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If short-term interest rates are lower than long-term rates, why might a borrower still choose to...

If short-term interest rates are lower than long-term rates, why might a borrower still choose to finance with long-term debt?

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Answer #1

Borrower choose long term debt even though short term rates are lower because of following reasons
1. The borrower might be investing in projects with longer payback period hence to manage cash flows they might focus on long term debt. Some projects generates cash flows only after certain period , long term debt helps these companies.
2. Long Term debt help in maintaining a definite capital structure which helps in calculating the cost of capital. With frequent changes in capital structure project might suffer and calculation of cost of capital becomes difficult.
3. Mergers and Acquisitions which are usually long term investment plans requires long term debt over short term debt.

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