[Anonymous]

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.

You answered C. The correct answer is D.

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.

So, I chose answer C, how or why is this incorrect?

I have seen numerous questions that say long term debt is more risky, due to interest rate risk….

am I wrong for assuming credit and debt are the same

[Anonymous]

bump???

[Anonymous]

Anyone?

[Anonymous]

Mortgage vs payday loan, think of it that way

[shikari1985]

@ Dethnode, when I read the answer choices, I chose D without any other option being reasonable. You can eliminate A for the second part being wrong, and B for mentioning prepayment penalties (which is not the case). C could be viable option but then, if you read option D, it sounds reasonable because short term loan can be quicker and short term loan is the one that fluctuate not long term (which is usually fixed). The confusing part in option C is the shape of the curve for interest cost which tends to be constant or marginal increase when compared to increase in years (usually from 15 year to 30 years there is no big difference in the interest rate), making the option C, incorrect. I hope that helps..

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[Peach1024]

Long-term debt is always “safer” than short-term debt, as the interest rates tend to be lower and more stable over time. Plus with short-term debt you have to renew more often (as the problem's answer stated), so you run the risk of getting stuck with a higher interest rate or possibly not being able to renew that debt at all.

When you say you've seen multiple problems about how long-term term is risky due to interest rate risk, I think those problems apply to debt vs. equity. Financing with debt (like a loan from the bank) is always riskier than financing with equity (like issuing common stock) because of interest rate risk. This applies to any debt, whether short-term or long-term.

Hope this helps!

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FAR - scheduled for 10/20/14

[Author]

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