A company X has funded its operations by bank loans extensively The interest rate on the loans is tied to the market interest rates and is adjusted every six months Thus the cost of funds is sensitive to interest rate movements Because of expectations that the Zambian economy would strengthen during the next year, the company plans further growth through investments The company expects that it will need substantial long term financing to finance its growth and plans to borrow additional funds in the debt market REQUIRED What can be the companys expectations about the change in interest rates in the future Why How would these expectations affect the companys cost of borrowing on its existing loans and on future debt How will these expectations affect the companys decision when to borrow funds and whether to issue floating rate or fixed rate debt Can you think of any financial innovation in the past ten years that has affected you personally Has it made you better off or worse off Why Briefly explain the loanable fund theory and Liquidity preference theory of interest rate determination Briefly explain the meaning of asymmetric information and how this could lead to the problems of adverse selection and moral hazard in the financial markets

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Posted on Jul 07, 2024

A company X has funded its operations by bank loans extensively. The interest rate on the loans is tied to the market interest rates and

A company X has funded its operations by bank loans extensively. The interest rate on the loans is tied to the market interest rates and is adjusted every six months. Thus the cost of funds is sensitive to interest rate movements. Because of expectations that the Zambian economy would strengthen during the next year, the company plans further growth through investments. The company expects that it will need substantial long-term financing to finance its growth and plans to borrow additional funds in the debt market.

REQUIRED:

1. What can be the companys expectations about the change in interest rates in the future? Why?
1. How would these expectations affect the companys cost of borrowing on its existing loans and on future debt?
1. How will these expectations affect the companys decision when to borrow funds and whether to issue floating-rate or fixed rate debt?
1. Can you think of any financial innovation in the past ten years that has affected you personally? Has it made you better off or worse off? Why?
1. Briefly explain the loanable fund theory and Liquidity preference theory of interest rate determination.
2. Briefly explain the meaning of asymmetric information and how this could lead to the problems of adverse selection and moral hazard in the financial markets.