Question 2.5: Bolt Industries is facing increased competition and wants to...
Bolt Industries is facing increased competition and wants to borrow $10 million in cash to protect against future revenue shortfalls. Currently, long-term AA rates are 10%. Given its credit rating, Bolt can borrow at 10.5%. The company is expecting interest rates to fall over the next few years, so it would prefer to borrow at short-term rates and refinance after rates drop. However, Bolt’s management is afraid that its credit rating may deteriorate as competition intensifies, which may greatly increase the spread the firm must pay on a new loan. How can Bolt benefit from declining interest rates without worrying about changes in its credit rating?
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