Economics Question! Interest Rates?

Question

Does the movement of interest rates affect the profitability of a firm in the short run? in the long run?

any help would be awesome, thanks!

Answer 1

In the short run, always. HOW it affects profits depends on whether the firm is a borrower or a lender. Some firms cash flow covers their investment and dividend and have + net interest on their accounts. Others borrow money and have minus net interest on their annual profit-and-loss accounts.

In the long run, higher real interest rates reduce profitability for most businesses because they slow the economy down. (That's the intention. Central banks raise interest rates in order to curb inflation.) Some businesses thrive in recessions and others are indifferent to them, but most, inevitably, are losers.

Answer 2

Depending on where the assets or liabilities are. The quick answer is yes, but typically there is a lag between the interest rate movement and the effect on profitability of the firm.

Answer 3

If a firm is selling bonds, clearly interest rate will effect profitablity.

Long term interest rate questions vary from model to model, but profitability doesn't play a big role in macro models (since you normally work with competitive markets).

Answer 4

yes