Firms generally choose to finance temporary assets with short-term debt because
A) Matching the maturities of assets and liabilities reduces risk.
B) Short-term interest rates traditionally have been more stable than long-term interest rates.
C) A firm that borrows heavily long-term is more apt to be unable to repay the debt than the firm that borrows heavily short-term.
D) The yield curve traditionally has been downward sloping.
E) Sales remain constant over the year,and financing requirements also remain constant.

Question

Quizplus · Accepted Answer

Matching the maturities of assets and liabilities reduces risk by avoiding the possibility of having to pay off long-term debt with short-term assets. Short-term debt is appropriate for financing temporary assets, such as inventory and accounts receivable, which are likely to be converted to cash within a year.

Firms Generally Choose to Finance Temporary Assets with Short-Term Debt