Question

Describe the differences of fixed-rate debt and variable-rate debt financing. Which one would you recommend is appropriate during a time of inflating interest rates?

Answer 1

In Fix rate debt financing you have to repay fixed amount on your debt. Interest rate is fixed on such debt and it will not change irrespective of market condition.

Whereas in variable rate or floating rate debt financing, interest rate on your debt may change due to some macroeconomic factor. Interest rate can increase or decrease. So in such case repayment amount is not fixed and will change depending on interest rate.

If interest rate is increasing then one should opt for fixed interest rate, so that even if interest rate increases in coming future even then one will have to pay that lower fixed interest rate. And if interest rate is decreasing then one should opt for variable interest rate so that if interest rate falls then he has to pay lower amount.