Instruction8.1:

For the followingproblem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide$1,000,000 in financing for a threeyear period.

? Strategy#1: Borrow$1,000,000 for three years at a fixed rate of interest of7%.

? Strategy#2: Borrow$1,000,000 for three years at a floating rate of LIBOR+ 2%, to be reset annually. The current LIBOR rate is3.50%

? Strategy#3: Borrow$1,000,000 for one year at a fixedrate, and then renew the credit annually. The current oneyear rate is5%.

Refer to Instruction 8.1. Choosing strategy#2 will:

A.

guarantee the lowest average annual rate over the next three years.

B.

eliminate credit risk but retain repricing risk.

C.

maintain the possibility of lower interestcosts, but maximizes the combined credit and repricing risks.

D.

preclude the possibility of sharing in lower interest rates over the threeyear period.