TO: CEO
FROM: BUSINESS CONSULTANT
RE: FINANCING OPTIONS
DATE: 31 st May 2019
Structure of Interest Rates
The terminology represents the correlation between yields on bonds and their corresponding date of maturity. Thus, the structure portrays the anticipations of investors on the future fluctuations of interest rates (Malkiel, 2015). Also known as the yield curve, the US Treasury has always used as a benchmark where financial institutions use it to determine their rates of interest in savings and lending.
Advantages and Disadvantages of Long and Short-Term Financing
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Long-Term Financing |
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Advantages |
Disadvantages |
| Provides stability to the company as they will be no use to seek for further financing. | They have a fixed rate hence; it is hard to get out of them after agreements have been signed. Therefore, the company stands to lose on any reduction on the interest rates. |
| It offers an overview of the cost of capital in the long run as there is no need for constant renegotiation of the terms. | 2. The financing comes with high-interest rates compared to the short term financing as the installments made are smaller are also smaller. |
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Short-Term Financing |
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| There is the benefit of enjoying a reduction in interest rates. | There is the challenging of continually renegotiating the terms of agreement hence hard to predict future profits. |
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Recommendation for the Best Financing Strategy
The best financing for the construction of a new facility for the Target Corporation is through long-term loans as it gives the company the surety of the development being completed on time. With short-term financing, the construction work can be stalled when the interests increase, and the funds become inaccessible (Yazdanfar & Öhman, 2015). Furthermore, the management can calculate and estimate accurately future profits due to the interest being uniform throughout time, contrary to the company opting for short term loans.
References
Malkiel, B. G. (2015). Term structure of interest rates: expectations and behavior patterns. New Jersey: Princeton University Press.
Yazdanfar, D., & Öhman, P. (2015). Debt financing and firm performance: an empirical study based on Swedish data. The Journal of Risk Finance, 16(1), 102-118.
