Question

Dear All,

Could you please answer the below question.

"Given all-time low-interest rates, companies should borrow long term and use the borrowed money to takeover other firms. Discuss with suitable reasons, citing empirical evidence, whether you agree or disagree with this statement"

Thank you!

Answer 1

I am not agreed with this idea. This can be dangerous situation for local and small business. Their survival will come in danger, as they are being turned away by bank loan officers, but large corporations are borrowing vast sums of money for next to do nothing, simply. Because they can take a loan with low interest rate.

They won't have obligation to repay the loan early. Most of the companies try to repay the loan fast due to fear of compound interest, which impose a heavy burden on them.

But here situation is different, they need not to show hurry because interest is low for all time.

In this situation, company can stockpile the cash in their reserve. Most of the companies don't spend the money on acquiring the new business, equipment or jobs. Due to this cash movement in the market can decrease and development can be like; chicken and egg situation. Corporations keep waiting for the economy perk up, but the economy is unlikely to perk up if Corporation keep saving.

The Federal reserve has held official interest rates near 0 for almost two years which allows Corporation to sell bonds with only slightly higher return, even below 1%.This is not good-good situation for investors.

In fact, this step had hurt so many Americans whose income from saving have fallen substantially. Big companies like; Johnson and Johnson, PepsiCo and IBM have been among the major beneficiaries.