I read the following statement in my study guide:

Wrong decisions, such as using short-term debt to finance long-term projects just before interest rates rise, can be very costly.

Why would this be very costly? I interpret it as taking a loan with interest rate x, instead of interest rate y, where x < y to finance some project. Taking a loan with a lower interest rate seems better. Obviously, I'm misinterpreting this...so what's going on?

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    I'm voting to close this question as off-topic because it appears to be about financial management of businesses, not about personal finance. – ChrisInEdmonton Nov 16 '15 at 13:45
  • Where do you suggest to post it? I thought this board was for personal finance OR money. – inquisitve Nov 16 '15 at 13:59
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    @inquisitive Sorry, but the name of the site isn't its sole definition. Please see what's on topic at the help center. Notice in the off-topic list: "Questions about corporate or government finance ". We want this site to be useful for people who manage their own finances and investments, and not flooded with accounting or finance academic questions that have little direct bearing on personal finance. – Chris W. Rea Nov 16 '15 at 14:37
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    @inquisitve, you could probably rephrase the question to put it in terms of personal finance. – Bishop Nov 16 '15 at 14:51
  • Might be more at home in the economics area. Might not.... – keshlam Nov 16 '15 at 16:13

This is because short term debt needs to be rolled over to finance the long term project and so, when interest rates rise they will be refinanced at a higher interest rate. This means that it will end up costing more than if the company had taken out a long term loan at the lower rate. A long term project implies that the beneficial (incoming) cashflows will be long term but with short term financing the debt will come payable sooner which is why it needs rolling over; any beneficial cashflows are not enough to cover the debt.

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