Should a MNC borrow primarily short term when short-term interest rates are lower than long-term interest rates? Or should it keep the maturity the same but use a floating-rate loan rather than a fixed-rate loan? Explain

What will be an ideal response?

First, if short-term interest rates are lower than long-term interest rates, this may be an indication of impending increases in interest rates. In fact, if the expectations hypothesis of the term structure of interest rates holds, the long rate is simply an appropriately weighted average of short term rates. This implies that "timing" the loan by having a floating interest rate that allows for low interest payments when short rates are low and high interest payments when short rates are high does not add value. Second, the difference between simply borrowing short-term and using a floating rate note is that the latter approach also locks in the MNC's credit spread. If the firm thinks its credit rating will improve over time, it may not want to issue a floating rate note, preferring instead to borrow short-term and borrow again at a better credit spread after the information is incorporated by the market.