Interest rates increase

Two different answers can be obtained for Example 10-17 because as the interest rate increases the net present value of money earned in future years decreases. This means that high interest rates favor projects that have large initial incomes and low initial costs. Low interest rates favor projects with low initial earnings and high initial outlays. 

Secured creditors will charge lower interest rates because security reduces their risks, but unsecured creditors will raise their interest rates in response because security reduces the assets on which they can levy, and so increases their risks The interest rate reductions are precisely matched by interest rate increases hence, the firm makes no net gain from granting security. ... 

An originator with 100 million of imsecured debt, bearing an interest rate of X percent, plans to repay 50 million of this unsecured debt with the proceeds of a new 50 million issuance of secured debt. The principle of exposure conservation states that the interest rate on the secured debt will be reduced to X-Y percent, but this reduction in rate will be matched by an interest rate increase on the remaining unsecured debt to X+Y percent. This analysis assumes that the unsecured creditors are free to adjust to a market rate. Therefore, according to the theory, the originator makes no net gain from granting security. 

Residual floppiness in the chain renders a critical distance unlikely. Although the entropy theory correctly predicts a trivial rate increase in such a system, the system itself is trivial. The really interesting rate increases, some of them reaching enzymatic levels, are not addressed by entropy theory. 

The fixed-rate payer will receive the floating-rate payments. And these payments have a present value of 11,459,495. The present value of the payments that must be made by the fixed-rate payer is 9,473,390. Thus, the swap has a positive value for the fixed-rate payer equal to the difference in the two present values of 1,986,105. This is the value of the swap to the fixed-rate payer. Notice, when interest rates increase (as they did in the illustration analyzed), the fixed-rate payer benefits because the value of the swap increases. 

A rise in interest rates increases the value of most call options. For stock options, this is because the equity markets view a rate increase as a sign that share price growth will accelerate. Generally, the relationship is the... 

A rise in interest rates increases the value of most call options. For stock options, this is because the equity markets view a rate increase as a sign that share price growth will accelerate. Generally, the relationship is the same for bond options. Not always, however, since in the bond market, rising rates tend to depress prices, because they lower the present value of future cash flows. A rise in interest rates has the opposite effect on put options, causing their value to drop. The risk-free interest rate applicable to a bond option with a term to expiry of, say, three months is a three-month government rate—commonly the government bond repo rate for bond options, usually the T-bill rate for other types. 

If the fractional inflation rate is a fractional interest rate on a loan can be corrected to an effective rate of interest by Eq. (9-116) with ii substituted for (DCFRR). The effect of various amounts of loan, borrowed at various interest rates ii, on the net present value of a particular, fairly simple project is shown in Fig. 9-37. Thus, if 25,000 were borrowed at an interest rate of 15 percent for the project, the (NPV) would be about 43,000 at a zero inflation rate. But if the inflation for goods and services i, is 10 percent, the effective interest rate for that loan can be calculated from Eq. (9-116) to be only 4.55 percent. It is seen from Fig. 9-37 that this increases the (NPV) of the project to 48,000. This confirms the economic advantage of borrowing at a fixed interest rate in a time of general inflation. 

The interest-rate equivalent of the cash discounts is 2 percent per month, since this discount could he obtained every month if payment were to he made at the beginning of the month rather than, as at present, at its end. Since the hills are settled monthly, the notional interest is paid monthly and should not he compounded. The discount is equivalent to 12 monthly simple-interest payments per year. Hence, from Eq. (9-31) the effective annual interest rate on discounts = (12)(0.02) = 0.24 = 24 percent. It would, therefore, he a good use of surplus cash to reduce this debt as quickly as possible. This would require cash equivalent to one-sixth of the annual hills due, or 16,700, to he avadahle. It can, therefore, he assumed that this level of liquidity is not available for capital projects, either as working capital to reduce the debt or for fixed-capital projects. Further, since the new project will not increase sales, it cannot generate further debt of this kind. Hence, this source is not available to capitahze the new project. 

Since neither increased bills due nor increased tax debt is available to finance the new project, this implies that the required 100,000 of new capital will be available as 50,000 from increased overdraft and 50,000 from increased equity. The effective interest rate on the equity involved must therefore be calculated. 

Equity holders require a real return on their outlay, which they assume to be at the stock-market price if this differs from the face value of the stock, of 7 percent net of all taxes. Retained earnings attract a 40 percent capital gains tax hence the actual interest rate required on distribution forgone is 7/(1 — 0.40) = 11.67 percent. This is in real terms and at a time of 8 percent inflation rate must be increased in cash terms to (1 -I- 0.1167)(1.08) — 1 = 20.60 percent. 

The interest rate due on deferred tax is also net of corporation tax at 9.42 percent. The interest payable on overdrafts is an expense fully allowable against tax, so that the effective aftertax rate is reduced to (16.18)(1 — 0.50) = 8.09 percent. Similarly, as the advantage forgone on the discounts would tend to increase company profits and hence tax due, the effective aftertax gain is reduced to (24)(1 — 0.50) = 12.00 percent. 

CBA relies heavily on the costs of environmental impacts. Some impacts may be easily expressed in monetary values, like crop loss or even increased morbidity among people. Others, like impact on biodiversity and the depletion of natural resources, are more difficult to describe in terms of monetary values. Large time scales and global impacts also complicate the methodology and confuse the understanding of the results. Some of the environmental consequences of today s activities appear only after several hundred or thousand yeats. Even low interest rates tend to diminish these types of impact, even if they are very large. 

Different filter areas and types are compared in Fig. 16.6. Due to the short annual operating time in this case, the optimum area was rather small. In the sensitivity analysis the variation of the interest rate did not significantly influence the ranking of the alternatives. An increase in operating time results in larger filter areas becoming more cost-effective. 

FIGURE 16.6 Optimizing the filter area of a ventilation unit. The calculation period is 2D years and the interest rate is 4%. The annual operating time of a ventilation unit is less than 2600 hours. The optimum filter area increases with increasing operating time. 

In addition to specific deductions and credits, the Tax Code permits state and local governments to issue bonds on which the interest is exempt from federal income tax. This provision means that states and local governments can borrow at interest rates below those paid by private corporations. Municipally owned electricity providers often can issue tax-exempt debt the lower interest rate may have the effect of increasing the provision of electricity by these entities. 

As mentioned above, state and local governments can boiTow at relatively low interest rates by issuing tax-exempt debt, and this finance technique is used to a gi eat extent in highway and road construction. By reducing the cost of road construction, tax-exempt debt may increase the amount of construction undertaken, thereby increasing the demand for fuels. 

Inflation increases costs arising in the future this can make an alternative which is more expensive initially, but has lower maintenance costs, more attractive. In effect, it reduces the effective interest rate in a DCF calculation. This can be taken into account by using a variation of the above equation. If the annual inflation rate is / %, then... 

Proteins may be covalently attached to the latex particle by a reaction of the chloromethyl group with a-amino groups of lysine residues. We studied this process (17) using bovine serum albumin as a model protein - the reaction is of considerable interest because latex-bound antigens or antibodies may be used for highly sensitive immunoassays. The temperature dependence of the rate of protein attachment to the latex particle was unusually small - this rate increased only by 27% when the temperature was raised from 25°C to 35°C. This suggests that non-covalent protein adsorption on the polymer is rate determining. On the other hand. the rate of chloride release increases in this temperature interval by a factor of 17 and while the protein is bound to the latex particle by only 2 bonds at 25°C, 22 bonds are formed at 35°C. 

The reason for the rate increase in the presence of phenylhydrazine remains unclear. The authors note that phenylhydrazone also accelerates the reaction and that the formation of the hydrazone from the solvent (acetone) cannot be ignored. Phenylhydrazine is known to reduce Cu(II) to Cu(I) (115), and the authors observed that the hydrazone is also capable of this reduction. It is interesting that the same rate acceleration could not be induced by other amine bases such as pyridine, l,5-diazabicyclo[4.3.0]non-5-ene (DBN), or DBU. While it is likely that phenyl-hydrazine-phenylhydrazone accelerates the slow step of the catalytic cycle through some sort of interaction with the metal, the exact nature of this involvement remains unclear. Elucidation of its role in the reaction may greatly aid the development of this transformation, and it is expected that it will impact the ultimate solution to this problem. 

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