The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates.

Question

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The term structure of interest rates refers to the relationship between the interest rates and the time to maturity of the debt. If interest rates are low for long-term debt but high for short-term debt, companies may choose to issue more long-term debt to take advantage of the lower rates. On the other hand, if short-term rates are lower than long-term rates, companies may favor short-term financing. Therefore, the term structure of interest rates will influence the ratio of long-term financing to short-term financing at any given time.

The Ratio of Long-Term Financing to Short-Term Financing at Any