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Question 4: Current macroeconomic environment is associated with rising monetary policy interest rates, as set by the Central Banks, e.g. the U.S. Fed. Specifically, the
Question 4: Current macroeconomic environment is associated with rising monetary policy interest rates, as set by the Central Banks, e.g. the U.S. Fed. Specifically, the Fed has been hiking policy interest rates that are used by the banks to reference-price private sector loans at an unprecedented pace since early 2022. In Lecture 1 Part 4 we identified the following key frameworks for Benchmark Pricing of Basic Debt: 1. Cost of Debt and YTM 2. Cost of Debt using Debt Rating Approach 3. Cost of Debt with Risk Premium (a) In your opinion, how do rising policy interest rates influence cost of debt faced by companies through YTM, Debt Rating and Risk Premium approaches? Explain your answer. (b) Do hikes by the US Fed influence companies' Degree of Total Leverage? And if so, how? If not, why not? Explain your answers.
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