Explain how changes in the yield curve affect the organizations cost of financing? Break down the...

Explain how changes in the yield curve affect the organizations cost of financing? Break down the determinants of market interest rates.

Expert Solution

when the yield curve will be upward sloping, it will mean that the rate of interest on the long term bonds will be higher and the overall finance cost of the company is going to go up on debt financing because they will be raising capital on a higher rate of interest due to higher rate of interest in the overall economy

when the yield curve will be downward sloping, it will be an inverted yield curve and there will be a risk related to the recession and the overall rate of interest in the economy will be lower because the interest on the long term Bond will be lower than the short term bonds, and it will mean that the businesses will be getting in lower rate of interest on their loans because the Federal Reserve wants to stimulate the economy.

Market interest rate is combined of various factors like risk related to default on principal and interest along with risk related to liquidity and risk related to maturity. There will be premium associated with them.

jeff jeffy answered 2 years ago

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