If you an investor, would you rather have a firm issue a fixed or variable rate?...

If you an investor, would you rather have a firm issue a fixed or variable rate? Why?

Expert Solution

Answer: variable rate should be preferred.

Investors used to take loan for investing in upcoming projects or expanding the existing one. Whatever be the circumstances, such investment give return in future. Initially the return is small and as the time goes on return increases, (suppose there is a loss in first 2 years and thereafter there is profit). Therefore, there is necessity of adjusting the amount of interest based on the amount of returns – the interest amount should be low at lower amounts of returns, and should be high at higher amounts of returns.

Fixed rate doesn’t have such flexibility, only the variable rate has. Therefore, the variable rate is preferred.

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