FINANCIAL MARKETS: ANSWER WITH NO PLAGIAR. Question 3 As the treasurer of a manufacturing company, your task is to forecast the direction of interest rates. Your company plans to borrow funds and it may use the forecast of interest rates to determine whether it should obtain a loan with a fixed interest rate or a floating interest rate. The following information can be considered when assessing the future direction of interest rates: . Economic growth has been high over the last two years, but you expect that it will be stagnant over the next year. . Inflation has been 3 percent over each of the last few years, and you expect that it will be about the same over the next year. . The federal government has announced major cuts in its spending, which should have a major impact on the budget deficit. . The Federal Reserve is not expected to affect the existing supply of loanable funds over the next year. . The overall level of savings by households is not expected to change. Questions: 1) Given the preceding information, assess how the demand for and the supply of loanable funds would be affected (if at all), and predict the future direction of interest rates, 2) Your company can obtain a one-year loan at a fixed-rate of 8 percent or a floating-rate loan that is currently at 8 percent but its interest rate would be revised every month in accordance with general interest rate movements. Which type of loan is more appropriate based on the information provided?

0% Fixed Rate

What Is a Fixed Rate Loan?
A fixed interest rate is a rate that does not change, such as a loan or mortgage. It may apply for the entire loan term or just portion of it, but it is constant. Mortgages can have a variety of interest rates, including a hybrid mortgage with a fixed rate and an adjustable rate. These are "hybrids."

KEY LESSONS
A fixed interest rate reduces the possibility of a rising mortgage or loan obligation.
Fixed interest rates can be higher.
During low-interest periods, borrowers prefer fixed-rate loans.
How Do Fixed Rates Work?
For those who don't want their interest rates to fluctuate during the course of their loans, potentially increasing their interest expenses and thus their mortgage payments. Avoids the danger of floating or variable interest rates, where the rate payable on a debt obligation might vary depending on a benchmark interest rate or index. 1

A fixed-rate loan's interest rate stays the same throughout its life. It's easy to budget because the borrower's payments remain constant.
Calculating Fixed Interest Rates
Calculating a loan's fixed interest rate is simple. You need just know:

The loan sum
The p.a.
Time to repay a loan
Assume you take out a $30,000 debt consolidation loan with a 5% interest rate. Total interest paid: $3,968.22 (approximate monthly payment: $566). This assumes you don't increase your monthly payment or make lump-sum principal payments.

Here's another. A 30-year mortgage for $300,000 at 3.5 percent. A $1,347 monthly payment equates to $484,968 in total mortgage fees, including interest.

Calculate fixed interest rate charges for personal loans, mortgages, and other credit lines.
A/V Interest Rates
Adjustable-rate mortgages (ARMs) have variable interest rates. A borrower usually receives an introductory rate for one, three, or five years. After then, the rate adjusts periodically. No such modifications occur with a fixed-rate loan that isn't hybrid. 2

On a $300,000, 30-year mortgage with a 5/1 hybrid ARM, the bank offers a 3.5 percent introductory rate. Their monthly payments are $1,347 for the first five years, but they will change dependent on the Federal Reserve's or another benchmark index's interest rate.

If the rate rises to 6%, the borrower's monthly payment jumps from $1,799 to $452. If the rate decreased to 3%, the monthly payments would be $1,265.

If the 3.5 percent rate was fixed, the monthly payment would be $1,347 for 30 years. The monthly costs may vary due to changes in property taxes or homeowners insurance, but the mortgage payment does not.

Fixed-rate loans are predictable, whereas variable-rate loans are always a gamble.

Fixed Interest Rates: Pros and Cons
Fixed interest rates have both benefits and drawbacks. Comparing the benefits and drawbacks of fixed- and variable-rate loans might help you decide.

They are predictable.

Affordability at low interest rates

Calculating long-term borrowing costs

Cons
Rates that are not adjustable

If rates fall, you may pay more.

Refinancing at a lower rate takes time and money.

Pros defined
Predictability. Fixed interest rates ensure consistency in monthly loan payments.
No-fee When interest rates are near historic lows, a fixed rate loan can be more appealing.
Compute costs. Because the interest rate on a loan or line of credit is constant, it is easy to determine the lifetime cost of borrowing.
Explained:
Above adjustable rates A fixed-rate loan may have a higher interest rate than an adjustable-rate loan, depending on the overall interest rate situation.
Rates fall. Unchanged rate loans lock you into a higher rate, whereas variable rate loans move in lockstep with the benchmark rate.
Refinancing. Moving from one fixed-rate loan to another or from one variable-rate loan to another can save money when rates drop, but it takes effort and money.
Fixed rates usually outperform adjustable rates. Adjustable-rate loans have lower initial rates than fixed-rate loans, making them more enticing when interest rates are high.

Borrowers choose fixed interest rates during low interest rate periods when locking in a rate is advantageous. If interest rates fall, the opportunity cost is still lower than when rates are high.

Remember that your credit score and income might impact the interest rates you pay on loans, whether fixed or variable.
Considerations
The Consumer Financial Protection Bureau (CFPB) gives a range of interest rates based on region. The prices are updated biweekly, and you may input your credit score, down payment, and loan type to compare a fixed rate against an ARM.

Step-by-step explanation

Floating Rates
GRANT, Mitchel
SOMER ANDERSON REVIEWED JUNE 30, 2021
Floating Interest Rates
A floating interest rate is one that fluctuates based on economic or financial market conditions. It often moves in lockstep with an index or benchmark, or with market conditions. It is also known as an adjustable or variable interest rate since it might change over time.

KEY LESSONS
Unlike a fixed (or constant) interest rate, a floating interest rate adjusts periodically.
Floating rates are frequent with credit cards and mortgages.
Floating rates follow the market or an index.
Floating or variable rates.
Floating Interest Rates
A variable interest rate moves with the market or another benchmark rate. However, it is typically associated with the London Interbank Offered Rate (LIBOR), the federal funds rate, or the prime rate (the interest rate financial institutions charge their most creditworthy corporate customers).

Banks and financial institutions impose a spread above this benchmark rate for consumer loans and debt (such mortgages, car loans, and credit cards), the spread dependent on the asset type and the consumer's credit rating. A floating rate is defined as "LIBOR plus 300 basis points" or "plus 3%."

Quarterly, semiannual, or annual rate changes are possible.
Floating-rate loans and debt instruments are ubiquitous. They are frequent with credit cards and mortgages.

Floating-rate product types
ARMs are adjustable-rate mortgages (ARMs). Rates for ARMs adjust based on a margin and a key mortgage index like LIBOR, COFI, or the Monthly Treasury Average (MTA). If someone gets an ARM with a 2% LIBOR margin and LIBOR is at 3% when the mortgage adjusts, the rate resets at 5%. (the margin plus the index).

Unpaid balances on most credit cards accrue variable interest. The annual percentage rate (APR) of a credit card is based on the so-and-so rate or index plus a set amount (margin). "This APR will vary with the market," they frequently say.
Credit card interest rates are largely based on the prime rate, which is determined by the Federal Reserve multiple times a year, plus a margin that varies by card product and account holder credit quality.

Floating vs. Fixed Interest Rate
A fixed interest rate is one that does not alter. It may apply for the entire loan period or only part of it.

Residential mortgages are available with fixed or variable rates. With fixed interest rates, the mortgage rate remains constant throughout the term of the loan. Floating or variable mortgage rates fluctuate with the market.

For example, if someone takes out a 4-percent fixed-rate mortgage, they will pay that rate for the whole length of the loan. A variable rate mortgage, on the other hand, may start at 4% and subsequently fluctuate up or down, affecting monthly payments.

Floating Rate Loan Example
Herbert and Amanda buy a $500,000 30-year 7/1 ARM. Their loan's interest rate is set at 2% for seven years. After then, the mortgage resets to a variable rate that fluctuates once a year, tied to the LIBOR. Eventually, their interest rate jumps to 4%. In the ninth year, LIBOR has fallen somewhat, lowering their interest rate to 3.7 percent. After ten years, it drops to 3.5 percent. Until they pay off their mortgage in full or refinance it, the couple's mortgage interest rate will change annually.
Floating Rates: Pros and Cons
ARMs feature lower beginning rates than fixed-rate mortgages, which may appeal to some borrowers. Anyone planning to sell their home and pay off their loan early, or expecting their equity to grow rapidly as home values rise, may opt for an ARM.

Another benefit is that floating interest rates may fall, cutting monthly payments.

Of course, the reverse is possible. The main problem of a floating rate is that it may rise, increasing the borrower's monthly payments or perhaps making them unattainable. A floating rate loan is unpredictable, making it difficult to estimate cash flow and calculate borrowing expenses. And, unless you're the Fed's chair, you can't influence the forces that modify rates.

CHACONDIZ DI VIRGILIO, CFP® CHACONDIZ DI VIRGILIO, CIMA®

It's better to avoid variable rate loans for long-term borrowing, especially when interest rates are as low as they are now.

It's critical to know how much your debt will cost so you can budget accordingly.

Using a variable rate loan is like betting on reduced interest rates in the future. Each year, a changing interest rate environment may bring a new and perhaps higher interest rate, increasing your interest payments.

A floating rate loan is a bad choice when rates are historically low, as they are now. So, using a fixed-rate loan makes sense, especially now.