1. A company X has funded its operations by bank loans extensively. The interest rate on the loans is tied to the market interest rates and is adjusted every six months. Thus the cost of funds is sensitive to interest rate movements. Because of expectations that EU economy would strengthen during the next year, the company plans further growth through investments. The company expects that it will need substantial long-term financing to finance its growth and plans to borrow additional funds in the debt market.
a) What can be the company’s expectations about the change in interest rates in the future? Why?
b) How would these expectations affect the company’s cost of borrowing on its existing loans and on future debt?
c) How these expectations would affect the company’s decision when to borrow funds and whether to issue floating-rate or fixed rate debt?
2. Assume that the government makes a major sale of bonds to the private sector.
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