Chapter 10.2, Problem 3R

To determine

To state: The ways in which interest rates affect the profits of a company.

Answer to Problem 3R

Change in interest rates affects the profits of the company in many ways like decision regarding taking loans, or issuing bonds etc.

Explanation of Solution

Interest rates have huge impact on the profits of the company. When interest rates are high, it is difficult for companies to take loans. In such case, companies wait for the interest rates to decrease so that they can take loans at a lower interest rate. They can even go for short term loans also.

Interest rates also affect the decision of the company to issue bonds. If the interest rates are high, the company must issue bonds at a high coupon rate otherwise investors will not come. When the interest rates are low, the company can issue bonds at a low coupon rate.