Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Yield curve
- This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
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- February 7, 2016 at 9:20 am #299588
In a june 04 question (Blin), a listed company is described as having significantly increased its sales and has an aggressive working capital funding poilicy. it is “relying heavily on the overdraft”. the finance director now wants to get a long term bank loan and use part of it to pay off the overdraft.
the first part of the question asks to discuss the factors that will influence the interest rate that the bank will charge and says “.. make a reference to the yield curve”
now, the factors are 1. risk of default, 2. loan amount, 3. duration of loan, 4 Security offered
my questions to you:
1. where and how do i fit in the yield curve in these factors?
2. can the yield curve be an independent factor?regards
February 7, 2016 at 1:54 pm #299603All the yield curve is showing is the way interest rates change with the length of the borrowing.
It isn’t independent – it depends on the factors listed.
The more risk of default, the higher the interest rate will be.
The greater the amount, the higher the interest rate is likely to be.
The longer the loan, the different the interest rate will be depending on how interest rates are expected to change in the future.
The more security a firm is able to offer, the lower the interest rate is likely to be.February 7, 2016 at 6:55 pm #299633thank u sir!
February 8, 2016 at 8:05 am #299675You are welcome 🙂
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