Recently the Fed has been gradually focusing on interest rates in the US among other things....

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Finance

Recently the Fed has been gradually focusing on interest ratesin the US among other things. Discuss and provide an example ofinterest rate risk to a Multinational Corporation (MNC) given anexample of what you think the effect will be and why? Provide areal example of why rates are important to an MNC and your opinionoutside the textbook.

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Interest rate risk for corporations A companys credit risk is in part determined by its debt to equity ratio As interest rates rise equity falls because the company is paying out more interest This increases the overall credit risk of the company which in turn causes lenders to raise interest rates on new borrowings ll companies that lend or borrow money are subject to interest rate risk or IRR A company faces interest rate risk when interest rates change affecting the companys bottom line Each loan or borrowing a company is involved with has its own interest rate risk but the overall risk to the company of changing interest rates can be affected by many variables that should be analyzed and minimized One of the largest determinants of the interest rate risk a company is exposed to is its loan terms on its borrowings and on the loans it issues Even the majority of small businesses may face this problem if they offer terms to their customers For example if the business charges a fixed interest rate on its accounts receivable and shortterm interest rates increase it may find its bottom line dropping if it has to refinance its bank demand debt without any corresponding increases in what it charges customers If interest rates on trade receivables is kept in sync with interest rates on a companys borrowings the overall interest rate risk for the business is reduced Credit Risk A companys credit risk is in part determined by its debt to equity ratio As interest rates rise equity falls because the company is paying out more interest This increases the overall credit risk of the company which in turn causes lenders to raise interest rates on new borrowings The more debt exposure a company has the higher its overall interest rate risk is Overall Economic Climate The wider economic markets can have an impact on a companys interest rate risk In times of economic decline or recession a company can find refinancing and new borrowing more difficult and interest rates higher This is often a time when revenues decline as fewer customers are financing purchases The uncertainty of incoming cash flow coupled with the increased outgoing cash flow from interest payments increases the companys exposure to interest rate risk Foreign Exchange Rates The strength of the US dollar against other foreign currencies such as the pound or the yen can impact a companys interest rate risk if it is paying interest on foreign debt For example if a small clothing manufacturer is taking credit terms See Answer

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