Answer (C) is correct . If interest rates have declined, refunding with short-term debt may be appropriate. The bonds pay a higher interest rate than the new short-term debt. Assuming that rates continue to fall, the short-term debt can itself be refunded with debt having a still lower interest charge. The obvious risk is that interest rates may rise, thereby compelling the company to choose between paying off the debt or refunding it at higher rates.
Answer (A) is incorrect because The company will not benefit from short-term loans if interest rates rise.
Answer (B) is incorrect because The company should maintain the existing debt if prevailing interest rates are higher.
Answer (D) is incorrect because The company increases the cash flow problem by shifting to short-term loans.
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