Using The Credit Line Tied Down T Bill Rate

1358 Words Mar 25th, 2016 6 Pages
Answer 1.
I plan to use the credit line tied to the 3months T-bill rate. In loanable funds market which borrowers (my firm) demand funds and lenders supply them. The price in this market is interest rate.
Scenario a- The growth rate of GDP in the U.S is expected to increase
Since there is an expectation on the U.S GDP to increase, this means the increasing labor force in the market that indirectly increases the consumption and investments. May be the government’s spending potential is also increasing. These factors would create more demands in the loanable funds market. So the demand and supply in the loanable funds market determines the interest rates. The following exhibit 1a shows when demand is weak (D1) and the real interest rate low (r1). When GDP expectation is higher, the demand for the loanable funds is strong (D2) with the new real interest rate (r2).
When the demand for loanable fund is strong, I am expecting the real interest rate to go up. In that case my future financing cost would also go higher.

Scenario b - Inflation is forecasted to increase in the U.S.
Lenders usually demand a higher interest rate to compensate for the impact of inflation. Let’s assume the current interest rate (nominal) is 3%. Now in U.S, an inflation increase is forecasted, let’s say the expected inflation increase is 2%. Result of that, I believe that there may be an impact of my firm’s financing cost in the future. Let’s go through the scenario and find out how much interest rate…
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