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Questions and Answers
What is the potential impact of rising interest rates on a company's sales?
How are the borrowing costs affected by floating rates of interest?
If a company borrows at a margin over 6-month LIBOR, what happens if the 6-month LIBOR changes?
How do suppliers react to their own higher interest costs in response to rising interest rates?
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What does 'floating rates of interest' imply for the stability of borrowing costs?
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What could be a potential consequence for a company borrowing at a margin over 6 month LIBOR if the 6 month LIBOR changes?
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How do rising interest rates potentially impact a company's sales according to the text?
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What is the main reason for suppliers trying to increase their prices in response to rising interest rates?
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How does a company's profit or valuation change with movements in market rates of interest?
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What is the primary purpose of adjusting the borrowing cost frequently with floating rates of interest?
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Study Notes
Interest Rate Risk
- Movements in market rates of interest result in changes in cash flow, profit, or valuation for a company
- Changes in interest rates affect the cost of borrowing or the interest income from surplus funds
- Rises in interest rates may lead to:
- Reduction in sales due to decreased customers' disposable income
- Increased cost of purchases as suppliers raise prices to compensate for their own higher interest costs
Floating Rates of Interest
- Floating rates of interest adjust borrowing costs frequently to reflect changes in market rates
- Borrowing at a margin over 6-month LIBOR guarantees a fixed interest rate for a maximum of 6 months
- If 6-month LIBOR changes, the borrowing interest rate also changes, applying for the next 6 months
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Description
Test your knowledge on interest rate risk and floating rates by understanding how movements in market rates of interest can impact a company's cash flow, profit, or valuation. Learn about the effects of changes in interest rates on cost of borrowing, interest income, sales, and purchasing costs.
