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rsteel rsteel
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Explain the importance of considering interest rate fluctuations in financial planning.
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Business in Action

Business in Action


Edition: 9th
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bijin05bijin05
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Regardless of how financially solid a company is, the cost of money will vary over time because interest rates fluctuate. The prime interest rate (often called simply the prime) is the lowest interest rate offered on short-term bank loans to preferred borrowers. The prime changes irregularly and, at times, quite frequently. Sometimes it changes because of supply and demand; at other times, it changes because the prime rate is closely tied to the discount rate, the interest rate that the Federal Reserve charges on loans to commercial banks and other depository institutions. 
Companies must take such interest rate fluctuations into account when making financing decisions. For instance, a company planning to finance a short-term project when the prime rate is 3 percent would want to reevaluate the project if the prime rose to 6 percent a few months later. Even though companies try to time their borrowing to take advantage of drops in interest rates, this option is not always possible.

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