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Interest Rates & Capital Markets

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Please help with the following finance problems. Provide brief answers for each.

a. Assume that interest rates have increased substantially. Would this tend to increase or decrease the market value of a firm's liabilities (relative to the book value of liabilities)?

b. Suppose you are a manager in a manufacturing business. How are the capital markets relevant to the effective performance of your job?

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Solution Summary

The solution examines interest rates and capital markets. How capital markets are relevant to the effective performance of your job is determined. The explanation is given in 280 words.

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(a) Assume that interest rates have increased substantially. Would this tend to increase or decrease the market value of a firm's liabilities (relative to the book value of liabilities)?

Increase in the interest rate always tends to decrease the market value of the liabilities. Suppose a company has issued $100 par value bond at 10% coupon rate paid annually for 10 years period. If the interest rate increases to 12% ...

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Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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