CMA Study Group

Short term loans used to retire 10 years bonds

  • 1.  Short term loans used to retire 10 years bonds

    Posted 9 days ago
      |   view attached
    Hello,

    Please help me to understand the below mentioned scenario,why short term loans should be used to retire its 10 year bonds even if interest rates have declined over the last five years.

    Regards,

    Supriya 


  • 2.  RE: Short term loans used to retire 10 years bonds

    Posted 8 days ago
    Hi Supriya,

    The question gives u a context that, in which situation you may settle your long term debt with short term debt?

    Why they ask this question is,  that in normal situation no companies will settle their long term loans with short term loans bcz of the volatile nature of interest rates and availability of getting new loans.

    Question clearly asks you that from the below scenario which will Encourage a company to settle long term loan with short term.

    Now we will discuss the options in question...
    A. Company expects interest rate to increase in next 5 years. ( If company expects interest rate will go up in next 5 years it is not advisable to close a long term loan and take a short term loan now , bcz interest may increase at any time)
    B. Interest rate have increased over last 5 years. (in this option the past performance of interest in market shows a increasing trend so normally a company will presume that in future also interest will increase. So they will not close the long term loan.)
    C. Interest rate have decreased over past 5 years. (in this option the past performance of interest in market shows a Decreasing trend so normally a company will presume that in future also interest will Decrease. So they will try to take a new short term loan with lesser interest and settle the long term loan which is having higher interest)

    Hope my reply address your query.


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    Mohammed Nadeem
    Accountant
    Vi Sigma Apparel Group FZE
    Abu Dhabi
    United Arab Emirates
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