Interest Rates:

Many managers do not understand the various ways that interest rates can affect business decisions. For example, if your company decided to build a plant with a 30¬year life and shortterm debt financing (renewed annually), the cost of the plant could skyrocket if interest rates were to return to their previous highs of 12% to 14%. On the other hand, locking into high, long¬term rates could be very costly also with a long period when low short¬term interest rates were to be available. As you can see, the ability to know your economic environment and its impact on projected interest rates can be crucial to making good financing decisions.

Answer the following:

1. Describe two to three macroeconomic factors that influence interest rates in general. Explain the effects of each factor on interest rates.

2. Now think about the industry in which you are employed or one in which you have past experience. To what macroeconomic factors is your industry most sensitive?

3. Describe two contemporary factors that seem to be impacting your industry today, and identify their impacts on the interest rates experienced within your chosen industry.