Which of the following offers no protection for a firm’s lenders? (please provide the correct answer...

Which of the following offers no protection for a firm’s lenders? (please provide the correct answer and explain it. Also provide detailed explanation in relation to other parts, why other parts are not correct).

(a) a fixed charge

(b) a fixed rate loan

(c) a covenant

(d) a guarantee offered by a third party

Solutions

Expert Solution

The answer is option B. The interest rate charged on the loan will remain fixed during the period of loan but the capital value of a fixed rate loan is generally determined as a function of future interest rates at the time of calculation. This means that they contain a capital risk, in that if interest rates fall, the capital value of the loan rises, and vice versa

Option C is not the correct answer because covenents are limits or restriction on certain actions the company might be taking during the term of agreement. So they provide protection to firm's lenders.

Option D is not the correct answer because a guarantee offered by a third party is a legal promise made by a third party to cover a borrower's debt or other types of liability in case of the borrower's default.

Option A is not the correct answer because when a company borrows money as a fixed charge the lender will require security in the form of a fixed charge. This protects them from the risk of default.

jeff jeffy answered 1 year ago

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