[BenB]

Which of the following is correct?

A.
Short-term credit can be obtained more quickly than long-term credit, but long-term credit is more flexible.

B.
Short-term credit is generally less costly than long-term credit due to the prepayment penalties associated with long-term credit.

C.
The shape of the yield curve implies that interest costs will generally be higher using long-term credit than short-term credit.

D.
Short-term credit can generally be obtained quicker than long-term credit; however, short-term credit holds more risk due to the need to renew more often.

Explanation:
Short-term credit can generally be obtained quicker than long-term credit.
Generally short-term credit is more flexible than long-term credit.
Short-term credit is generally less costly than long-term credit as shown by the yield curve.
Prepayment penalties are generally associated with long-term credit, but these penalties are not the basic reasons for a higher cost for long-term credit.
Short-term credit holds more risk than long-term credit due to the need to renew more often.

My thoughts:
D was the answer, but I chose C. The BEC lessons repeatedly state that short-term credit is less risky than long-term. The explanation also provides support for answers B and C. This is probably one of the poorest questions I’ve seen yet for BEC.

FAR 7/11/16 - 87
BEC 9/9/16
REG TBD
AUD TBD

[Kbob]

Agreed 100%. C is a better answer. I like Ninja, but I'm mystified as to the benefit of including troves of questions without assigned authorities, i.e., that won't be tested and that fail to have a clear “best” answer. Gets in your head.

[Mike J]

The way I understood it, short-term debt offered more flexibility; MGT wasn't saddled with long term obligation in case their cost models (eg the four Capital Budget formulas) didn't work out as planned.

BUT, refinancing was easier to find with long-term debt. In essence, companies want to make money off of interest payments (why would they want to give you money or an initial break on a transaction?). You have to be able to assess the associated cost of a given set of choices.

Therefore, D makes most sense. I could be wrong though.

[Author]

Replies