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Working capital financing policy

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Working capital financing policy

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • May 22, 2017 at 3:53 am #387351
    quytuan
    Participant
    • Topics: 116
    • Replies: 46
    • ☆☆

    On page 137, BPP textbook F9 states that in the part of Working capital financing policy:
    “Short-term sources of funding are usually cheaper and more flexible than long-term ones. However, short-term sources are riskier for the borrower, as interest rates are more volatile in the short term and they may not be renewed”.
    In economics, there is a fact that in the short- term, interest rate is less volatile than in long-term. In long-term, interest rates are likely to substantially change. This can be seen from the reality that FED basic rate is stable from December 2008 to November 2015 at the rate of 0.25%, before interest rate rose to 0.5% in December 2015. Therefore, the statement in BPP textbook is true except the argument that ” interest rates are more volatile in the short term”.
    Please help me to verify this point.
    Thank you!

    May 22, 2017 at 5:57 am #387360
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Long-term finance will usually be arranged at fixed interest – either by arranging a fixed interest loan, or (more likely) by issuing bonds, which by their very nature are fixed interest.

    Short-term finance (i.e. overdraft) will not be at fixed interest.

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