Rising interest rates have increased the cost of capital for borrowers over the past year with the result that some projects may have to be postponed due to the higher cost. In recent months, bond prices have also increased, limiting the options available to financial managers. Other organizations might accelerate their capital expansion programs in order to avoid even higher interest rates (working under the assumption that interest rates will go higher). Even those companies which have little direct borrowing are affected by rising interest rates as their suppliers increase prices and their customers put off major purchases. In addition, the stock market has been particularly harsh with regard to high technology and "dot com" stocks with the result that raising capital through equity issues can be more difficult now than a few years ago. Companies considering economic expansion might have to turn to debt financing in order to generate the capital required to meet their goals.
Interest rates have risen over the past year as Alan Greenspan and the Federal Reserve have sought to keep the economy from expanding too rapidly. In response, bonds have also recently become more expensive for businesses to issue with interest rates also rising on these financial instruments (Aubin, 2000, p. C17). While some economic expansion is good for the economy and for business, rapid growth can lead to inflation, which Greenspan and others want to curtail in order to prevent a recession from following.
Bond coupon rates have crept up over the period in question as interest rates have also increased. While an increase of a quarter-percent might seem insignificant to some, it can have a significant impact on the cost of borrowing when the large sums typically associated with corporations and other large institutions are involved. An increase of one-quarter percent on a $10 million bond issue results in an additional liability of $25,000 in t...