Series 79 practice questionmediumDebt Maturity Profile
Which of the following is a risk of a capital structure with a large proportion of short-term debt relative to long-term debt?
- ARefinancing risk is elevated if markets tighten or interest rates rise.✓ Correct answer
- BThe company will always have a lower average cost of debt.
- CThe company’s liquidity risk is reduced.
- DThe company’s overall leverage ratio is reduced.
Explanation
Why A — Refinancing risk is elevated if markets tighten or interest rates rise.
Short-term debt exposes companies to refinancing risk during market disruptions or rate increases. Short-term debt may be cheaper but not guaranteed; it increases liquidity risk and does not affect the leverage ratio.
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