Final answer:
In a downward-sloping term structure where interest rates are expected to decline, a financial manager generally borrows at lower long-term rates to secure the more favorable terms over time. A fall in demand or rise in supply in the financial market will lead to a fall in interest rates. The correct option for the strategy employed by the financial manager is B.
Step-by-step explanation:
When the term structure of interest rates is downward sloping, indicating expected decline in interest rates, different strategies can be employed by a financial manager. This scenario suggests that long-term interest rates are lower than short-term rates. The financial manager could take advantage of the lower long-term rates by locking in those rates now, thereby avoiding higher costs in the future due to potential rate increases.
In terms of changes in the financial market, when there is a fall in demand or a rise in supply of loans, lenders tend to charge less due to competitive pressures, leading to a decline in interest rates. Conversely, high demand or decreased supply can result in higher interest rates.
When interest rates are expected to fall, it can be more beneficial to borrow long-term rather than short-term to take advantage of lower rates over the life of the loan. Therefore, the correct option for a financial manager when the term structure is downward sloping and interest rates are expected to decline is B. financial manager borrows at the lower long-term rates.