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How the Flow $of$ Funds Affects Interest Rates

Recall that Carson Company has obtained substantial loans from finance companies and commercial banks. The interest rate $on$ the loans $is$ tied $to$ market interest rates and $is$ adjusted every six months. Thus, Carson$scostof$ obtaining funds $issensitiveto$ interest rate movements. Given its expectations that the $U.S.$ economy will strengthen, Carson plans $to$ grow $in$ the future $by$ expanding and $by$ making acquisitions. Carson expects that $it$ will need substantial long$-$term financing $to$ pay for this growth, and $it$ plans $to$ borrow additional funds either through existing loans $orby$ issuing bonds. The company $is$ also considering the possibility $of$ issuing stock $to$ raise funds $in$ the next year.

Explain why Carson should $be$ very interested $in$ future interest rate movements.

Given Carson$s$ expectations, $do$ you think the company anticipates that interest rates will increase $or$ decrease $in$ the future? Explain.

$If$ Carson$s$ expectations $of$ future interest rates are correct, how would this affect its cost $of$ borrowing $on$ its existing loans and $on$ its future loans?

Explain why Carson$s$ expectations about future interest rates may affect its decision about when $to$ borrow funds and whether $to$ obtain floating$-$rate $or$ fixed$-$rate loans.

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