Question

Rankine Corporation could borrow the USD30 million in the Eurodollar market. Funding is needed for two years. Investigation leads to three possibilities:

(a) Rankine Corporation could borrow the USD30 million for two years at a fixed 5% rate of interest.

(b) Rankine Corporation could borrow the USD30 million at LIBOR +1.5%. LIBOR currently 3.5% and the rate would be reset every six months

(c) Rankine Corporation could borrow the USD30 million for one year only at 4.5%. At the end of the first year Rankine corporation would have to negotiate for a new one-year loan.

Compare the alternatives and make a recommendation.