Question

The interest rate a company pays on 1-year, 5-year, and 10-year loans is a function of a

a. its balance sheet strength as measured by its current ratio, debt-equity ratio, and accounts payable ration
b. how many consecutive years the company has been profitable, its interest coverage ratio, and the number of loans it has paid of in time in the past five years
c. its credit rating
d. its default risk ratio, its working capital ratio, its prior-year ROE and EPS, and its prior year net cash flow from operations
e. its credit rating and the length of the term over which repayment is scheduled to occur

Answer 1

The interest rates on company loans are primarily affected by the company's credit rating and the term length of the loan. This reflects the risk and financial health considered by lenders. The correct option for the student's question is the credit rating and term length. The correct answer is option e .

Step-by-step explanation:

The interest rate a company pays on 1-year, 5-year, and 10-year loans is significantly influenced by the company's credit rating and, to a lesser extent, the length of the loan. A credit rating is determined by factors such as previous borrowing history, repayment reliability, and financial measures like savings and investments. Moreover, financial metrics like profitability also play a role, as firms with a record of high profits have a credible ability to repay loans, making them more attractive to lenders.

It's essential to understand that banks and other financial institutions assess default risk and the borrower's financial health prior to determining the interest rates. Factors like interest coverage, profitability, and historical performance are crucial in this assessment. Interestingly, while companies often use bank loans, they might also issue bonds, and the interest rates on these bonds are affected by similar factors, including the company's credit rating.

In this context, the correct option for the student's question is e. its credit rating and the length of the term over which repayment is scheduled to occur. This encapsulates the primary determinant of interest rates on loans, considering both the company's ability to repay and the prevailing economic conditions that might affect the value of money over time.