Research Paper: Calculate Touring Enterprises' Weighted Average

Pages: 3 (1419 words)  ·  Bibliography Sources: 1  ·  Level: College Junior  ·  Topic: Economics  ·  Buy This Paper

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[. . .] 28. The same loan at a 10% rate would cost the consumer $1,610 over the same period. This $400 difference can be monumental for individuals who are experiencing stagnant wage growth. For example, the median household income is $48,000, which has only increased with inflation. However, as interest rates rise, they will undoubtedly outpace inflation leaving consumers strained.

The present and future values of annuities

The present value of annuities will decline due in part to the discount factor being higher. Because interest rates have risen, investors must now discount future cash flows with a higher interest rate. This will ultimately lower the present value of annuities as they are now worth less due to higher interest rates. Conversely the future value of annuities will actually be higher due in part to the increase in the discount factor. Rising interest rates will also affect the value of annuities. For example, an annuity paying $100 a year for 10 years at an interest rate of 5% would cost an investor $216.53. The same annuity with rising interest rates of 7% would cost an investor $116.34. This is approximately a $100 difference due to a 2% change in interest rates. As such, the present value decreases as the interest rate increase. Likewise the future value of these annuities interest rates would be $1,447 and $1,610. 51 respectively.

NPV calculation

Stocks and bonds do carry interest-rate risk: if general interest duties rise, the price of the bond will decline, at least until it approaches maturity. The price of the bond is equal to the NPV of the payments you'll receive. If you think interest rates are going to rise, you will want to use a higher discount rate to calculate the price you are willing to pay for the bond. Higher discount rates reduce NPV, making the bond less attractive. A higher interest rate also makes money overall more expensive. The cost of lending and borrowing will increase as a result of higher interest rates. This ultimately will alter the discount factor used to price securities, making them more expensive than they otherwise were under a low interest rate environment. Investors will subsequently change their behavior as a dollar now is worth much more under a high interest rate environment than it is today. For example the NPV of a project that is expected to generate $100 dollars of earnings for 10 years at a cost of $1,000 and an interest rate of 5% would be 55.077. The same project with an 8% interest rate would be 48.1872. As such the 5% project should be undertaken

Corporate earnings

Higher rates can reduce a company's value by raising borrowing costs for the company itself and for prospective customers. If a company relies in whole or in part on debt financing, higher rates will directly increase costs and reduce earnings.

Even if a company does not borrow itself, chances are that some of its customers do. Whether the company is selling its products to other companies or to consumers, some customers will almost certainly be less willing buyers due to the higher borrowing costs that will reduce their spending power. These factors are admittedly less significant for fast-growing, debt-free Internet companies, who are often not affected by higher borrowing costs, but they are still factors - virtually all companies have customers that will be affected by higher rates. Corporate earnings would also decline as companies would have to pay larger interest payments to creditors. Customers would have to pay higher interest payments to companies as they purchase goods on credit. In addition, consumers may purchase less product as monthly payments could quickly become unaffordable for the average consumer. This is the exact opposite of what is occurring today. Low interest rates encourage consumers to purchase homes, cars, and other big ticket items, as the cost of doing so is essentially free. Consumers of an inflation adjusted basis are actually paying nothing for borrowing money. This accommodative policy is intended to spur the economy and jump start economic activity. Once interest rates rise however, consumers will purchase less products which ultimately will lead to less economic activity in theory. For example a… [END OF PREVIEW]

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Calculate Touring Enterprises' Weighted Average.  (2013, August 4).  Retrieved July 18, 2019, from https://www.essaytown.com/subjects/paper/calculate-touring-enterprises-weighted/5804963

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"Calculate Touring Enterprises' Weighted Average."  4 August 2013.  Web.  18 July 2019. <https://www.essaytown.com/subjects/paper/calculate-touring-enterprises-weighted/5804963>.

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"Calculate Touring Enterprises' Weighted Average."  Essaytown.com.  August 4, 2013.  Accessed July 18, 2019.
https://www.essaytown.com/subjects/paper/calculate-touring-enterprises-weighted/5804963.