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You want to borrow $2 million now. There are two different loans for you to choose:

A short term loan which would give you $2 million now at 8% for one year.

A longer term loan which would give you $2 million today at 7.5% for two years. Interest on this loan would accrue and be paid at the end of the second year.

You expect to receive a payment one year from now which would be exactly sufficient for you to repay the short term loan at that time. If you take the long term loan, you will not be able to use this sum to repay the debt and will have to invest it for one year somewhere. You have an opportunity to lock in the interest rate now and invest this payment, one year from now, at a 1-year forward rate of 7%.

Which loan should you take?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92700698

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