Generally speaking, short-term debt is riskier than long-term debt, but it also
ID: 2614568 • Letter: G
Question
Generally speaking, short-term debt is riskier than long-term debt, but it also has some advantages. In the following table, identify which type of funding (short-term debt or long-term debt) is being described in each case. Short-term Debt Long-term Debt This loan allows firms to keep relatively stable interest costs over time This form of financing can be obtained faster. When a firm faces an upward-sloping yield curve, this form of debt is more expensive. Praxis Corp.'s CFO is concerned with the possibility of interest rates rising over time. Which type of debt would be riskiest to Praxis Corp. if the firm is most concerned with rising interest rates? O Short-term debt O Long-term debtExplanation / Answer
This loan allows firms to keep relatively stable interest costs over time – Long Term
This form of financing can be obtained faster – Short term
When a firm faces an upward sloping yield curve, this form of debt is more expensive – Short Term
Since we settle for fixed interest rates in the long term debt structure while the interest rate changes frequently in the short term structure as loans are for shorter duration.
Concerned about rising interest rates, which type of debt would be riskiest?
Short term Debt
When resources are used and payments are delayed, the result is the spontaneous creation of short-term LIABILITY
ACCRUALS, since the salaries will be paid on a monthly frequency rather than weekly and the amounts will accrue.
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