Question

For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.Refer to Instruction 8.1. Which strategy (strategies) will eliminate credit risk?

Answer 1

From the strategies provided, the correct debt strategies that will help a corporate borrower eliminate credit risk are strategy 1 and strategy 2, which are; Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. and Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%.