Intrest Rate Report - Essay Example

When interest rates are reduced the cost of capital declines and investors will be more willing to invest and therefore this will increase the level of investment in the organisation. High interest rates also mean that loans are repaid at higher rates, many consumers finance their purchases financed using borrowed funds from banks and for this reason businesses may experience a reduction in their sales level when interest rates are increased, therefore businesses will tend to hold less inventory when interest rates are increased especially when stocks are purchased using borrowed money from financial institutions.

A business will finance by equity and by debt, when the cost of debt rises as interest rates increase then the decision by business owners will be to finance through equity. For this reason therefore interest rates will affect the decisions made a business on how to raise capital for expansion purposes. The cost of operating businesses increases when interest rates are increased and the cost of operating businesses will decline when interest rates are lowered. . Current Yield curve:The yield curve is a curve that depicts the relationship between interest rates and date to maturity of securities.

Using data from the US treasury website the yield curve as of 21st January 2009 is as follows:From the above chart that depict the yield curve it is evident that the yield curve is an upward sloping curve. This means that if a business borrows for a period of 7 years then the higher will be the interest paid to the financial lender. Therefore the lower the borrowing period the lower the interest paid. Therefore business will opt to borrow for a short period of time to reduce the cost of capital.

On the other hand it is also means that the more an investor or institution holds financial instruments such as bonds then the higher will be the returns. Interest rates and customer demand at big drive auto:An increase in the level of interest rates in the economy will affect the level of sales at big drive auto. This is due to the fact that the cost of borrowed funds rise and consumers are less likely to borrow funds to fianc vehicle purchases. For this reason the sales levels are likely to decline.

The other reason why sales levels may decline is the fact that consumers may prefer to save rather than spend, high interest rates means that consumer savings will earn more in the economy and therefore a consumer will prefer to save or even invest in other attractive financial instruments such as stocks and bonds. If interest rates are to be reduced the cost of borrowed funds declines and more consumers are expected to be encouraged to borrow more form financial institutions to finance car purchases, therefore the demand for products at big drive auto will increase when interest rates