Mastering Interest Rate Risk Strategy

5

Financial statement impact from interest rate movements

Introduction

Liquidity

Solvency

Financial covenants

Cash cycle

Profitability

Share price ratios

INTRODUCTION

In Chapter 4 we’ve examined how interest rates are determined in the financial markets. In this chapter we’ll look at how interest rate movements in the financial markets impact the financial statements of a firm. In order to illustrate the effects we use a central case: Trader. Background information on Trader can be found in Appendix I.

The chapter is quite detailed but the reason for this is because the negative financial impact of interest rate fluctuations is a major risk to the firm. It is outside its sphere of influence and therefore it is often the basis for risk. ...