Interest costs for short-term debt are generally lower than interest costs for long-term debt because
A) the term structure of interest rates generally reflects an upward sloping yield curve.
B) short-term debt is more flexible, allowing a match of short-term needs with short-term financing.
C) investors demand higher returns on short-term debt due to liquidity concerns.
D) both A and B.

Question

Quizplus · Accepted Answer

The term structure of interest rates typically shows an upward sloping yield curve, meaning longer-term investments usually offer higher returns to compensate for increased risk over time. Additionally, short-term debt offers flexibility, allowing businesses to align their financing more closely with their immediate financial needs, which can be more cost-effective.

Interest Costs for Short-Term Debt Are Generally Lower Than Interest