Which of the following statement is true a Shortterm borrowi

Which of the following statement is true?

a) Short-term borrowing is more expensive than long-term and thus produces lower profits

b) Short-term borrowing is less expensive than long-term and thus produces higher profits

c) Short-term borrowing is less expensive than long-term and thus produces lower profits

d) Short-term borrowing is more expensive than long-term and thus produces higher profits

Solution

Correct option is > b) Short-term borrowing is less expensive than long-term and thus produces higher profits

Short term borrowing expense is lower than long term borrowing because risk premium is higher for long term loans. As short term interest rates are less the profits are high.