Which one of the following statements is correct?
A) Seasonal needs are financed with short-term loans when companies adhere to a flexible financing policy.
B) A flexible financing policy tends to increase the risk of encountering financial distress.
C) Long-term interest rates tend to be less volatile than short-term rates.
D) Most companies tend to finance inventory with long-term debt.
E) Short-term interest rates are generally higher than long-term rates.

Question

Quizplus · Accepted Answer

Long-term interest rates are typically less volatile than short-term rates due to the longer maturity and fixed rate nature of long-term debt. This stability is why companies may choose to finance long-term needs, such as fixed asset investments, with long-term debt. The other answer choices are incorrect; seasonable needs can be financed with short-term or long-term debt, a flexible financing policy may or may not increase risk, companies tend to finance inventory with short-term debt, and short-term rates tend to be higher than long-term rates due to the additional risk associated with shorter maturities.

Which One of the Following Statements Is Correct