Interest Rates on Treasury Bonds

Interest Rates
Student Name
Institutional Affiliation
Course Name and Number
Professor
Date
Interest Rates
Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short-term basis? Why?
There are many compelling reasons why the company should engage in long-term borrowing. When the economy is in a recession, consumers spend less money overall because of the higher cost of necessities. Customers will make financial sacrifices to lower their cost of living. It indicates that the company's sales will fall, resulting in decreased profits. Due to the lack of income, the company cannot make immediate payments toward its obligations.
Furthermore, the production cost will rise due to rising prices for raw materials and labor (Brigham & Houston, 2021). The company is going to increase its expenditure because the company's expenses are also going up. Even more so during times of economic contraction, the competition increases. There will be an increase in rival businesses competing for a limited pool of customers. As a result, the company will not have the financial stability necessary to meet its obligations within a concise amount of time. The optimal moment to take out a long-term loan is when the Federal Reserve stops actively cutting interest rates. Still, forecasting when it will happen is challenging because it can take several months to locate a private lender. When financial institutions believe there will be an increase in interest rates soon, they are not necessarily ready to provide long-term loans at low rates.
Supporting Statement
Borrowing money on a long-term basis is accurate in this scenario. One of the best methods to get money for your company's expansion when the economy starts to recover is to take out a long-term loan during a recession when interest rates are low. Many international companies use this strategy when it comes to issuing corporate bonds (Brigham & Houston, 2021). When the Federal Reserve stops making dramatic reductions to the interest rates, consumers will have a better opportunity to secure favorable terms on loans for extended periods. You will have more influence when you lock in your long-term rates if you choose a local or regional brokerage business. You can do it while interest rates are still falling since they will have access to more timely information.
Opposing Statement
Although long-term loans may be suitable in certain situations, there are difficulties associated with borrowing money at low-interest rates, even though the benefits of doing so are straightforward to comprehend. If a recession causes your company to experience slow sales, your earnings may not be sufficient to meet the interest payments on any new debt you may incur. If interest rates remain low for a prolonged period, you may need to make interest expenses using the borrowed money. However, if interest rates start rising again, then you can keep the borrowed money in interest-bearing instruments. It can...