Final answer:
A financial manager should utilize short-term financing when faced with a downward-sloping yield curve, as it indicates expectations of an economic downturn. The correct answer is option D. utilize short-term financing.
Step-by-step explanation:
Understanding the Yield Curve and Financial Strategy
When the yield curve is downward sloping, it generally indicates that short-term interest rates are higher than long-term rates, suggesting that investors expect weaker growth or possibly a recession in the future. This scenario influences a financial manager's decisions regarding financing strategies. While an upward-sloping yield curve might signal economic expansion, a downward-sloping yield curve should soberly temper expectations.
In the context of historical economic patterns, such as those during the technology boom of the late 1990s and the Great Recession of 2008 and 2009, businesses showed different levels of confidence and demand for financial capital, affecting their approach to investment and financing. During booms, there is typically a rightward shift in the demand for financial capital, and during downturns, the opposite occurs. Decision-making should be strategic, with careful consideration given to current economic indicators and expected future conditions.
Therefore, the most prudent choice for a financial manager when faced with a downward-sloping yield curve is to utilize short-term financing (D). This approach mitigates the risk of being locked into higher long-term interest rates if rates are expected to fall in the future. Conversely, during a period of economic growth with an upward-sloping yield curve, longer-term financing might be more advantageous as it would lock in lower rates before they rise.