CHAPTER 5

Interest Rate Risk Management

Effects of Interest Rate Risk

Variability of interest rates affects a firm in a wide variety of ways. The most obvious one is on the firm’s cost of debt. However, there are many other secondary effects in which interest rate affects the financial results of a firm.

As interest rates rise, the cost of equity financing also rises. Additionally, the availability of equity financing diminishes as debt becomes a more attractive investment asset for investors. As debt and equity costs rise, the weighted average cost of capital for the firm will also rise. An increased weighted average cost of capital can significantly alter the strategic plans of the firm by leading to fewer growth projects being accepted and ...

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