Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short-term rates? A. Yes, using short term financing will give the firm the lowest possible interest rate over the life of the project. B. No, the firm needs to take the volitility of short term rates into account. C. No, an upward sloping yield curve means that the firm will get a lower interest rate if it uses long term financing.

Question

Virginia Fuentes

Business

17 March, 10:12

Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short-term rates? A. Yes, using short term financing will give the firm the lowest possible interest rate over the life of the project. B. No, the firm needs to take the volitility of short term rates into account. C. No, an upward sloping yield curve means that the firm will get a lower interest rate if it uses long term financing.

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Answers (1)

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Mara Powers · Answer 1

The answer is B:

No, the firm needs to take the volatility of short term rates into account.

Explanation:

Upward slopping yield curve is the most common shape of yield curve. An upward slopping yield curve indicates that the financial markets have the expectations of short-term interest rates rising in the near future. Therefore, it is recommended to take the volatility of short term rates rising into account.