Podcast
Questions and Answers
What is the potential impact of rising interest rates on a company's sales?
What is the potential impact of rising interest rates on a company's sales?
- No impact on sales as customers' disposable income remains constant.
- Possible reduction in sales due to changing customers' disposable income. (correct)
- No change in sales as suppliers will compensate for the increase in interest costs.
- Increase in sales due to higher disposable income of customers.
How are the borrowing costs affected by floating rates of interest?
How are the borrowing costs affected by floating rates of interest?
- Borrowing costs are adjusted frequently based on market rate changes. (correct)
- Borrowing costs are guaranteed to decrease after every 6-month period.
- Borrowing costs remain fixed regardless of changes in market rates.
- Borrowing costs decrease when market rates increase.
If a company borrows at a margin over 6-month LIBOR, what happens if the 6-month LIBOR changes?
If a company borrows at a margin over 6-month LIBOR, what happens if the 6-month LIBOR changes?
- The borrowing cost increases.
- The borrowing cost remains unchanged.
- The borrowing cost decreases.
- The borrowing cost changes based on 6-month LIBOR fluctuations. (correct)
How do suppliers react to their own higher interest costs in response to rising interest rates?
How do suppliers react to their own higher interest costs in response to rising interest rates?
What does 'floating rates of interest' imply for the stability of borrowing costs?
What does 'floating rates of interest' imply for the stability of borrowing costs?
What could be a potential consequence for a company borrowing at a margin over 6 month LIBOR if the 6 month LIBOR changes?
What could be a potential consequence for a company borrowing at a margin over 6 month LIBOR if the 6 month LIBOR changes?
How do rising interest rates potentially impact a company's sales according to the text?
How do rising interest rates potentially impact a company's sales according to the text?
What is the main reason for suppliers trying to increase their prices in response to rising interest rates?
What is the main reason for suppliers trying to increase their prices in response to rising interest rates?
How does a company's profit or valuation change with movements in market rates of interest?
How does a company's profit or valuation change with movements in market rates of interest?
What is the primary purpose of adjusting the borrowing cost frequently with floating rates of interest?
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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