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1. Firms generally choose to finance temporary current operating assets with short-term debt because a. short-term interest rates have traditionally been more stable than long-term interest rates. b. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. c. the yield curve is normally downward sloping. d. short-term debt has a higher cost than equity capital. e. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

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Answer: e. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

Explanation:

When the maturities of assets and Liabilities are matched, it can help reduce certain risks like Liquidity risks. Picture this, borrowing short term for a long term asset. By the time the short term liability matures, the long term asset would not have matured which means you have to find another way to pay off the Liability obligation.

Also short term debt is less expensive than long term debt. This is because long term debt is exposed to both Interest and Inflation rate risk. Overtime there is a chance that inflation will erode the debt repayments or that interest rates might drop. Lenders hedge against this by increasing the rates on longer term debt instruments.

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