Question

Discuss the impact the Covid-19 pandemic will have on interest risk and liquidity risk with reference to the following groups:

1. Companies

2. Investors

3. Banking Institutions

Answer 1

1. Companies: Due to the lockdown across the world, companies are able to run their business well which is impacting their earnings and further there is a risk that they will not be paid the interest obligation on account of reduction in liquidity due to shut down of businesses. Companies plan to apply for forbearance and pay the debt sevice later on.
2. Investor: Investor are facing risk due to reduction in interest rates. Suppose an investor has invested in a govt security, now with the reduction in interest rates, their returns might go down. Also, there could be shortage of liquidity on the other side(borrowers' not paying on time).
3. Banking Institutions : Banks have annouced moratorium extension due to whcih there will be a daelay in interest and principal payments from the borrowers thereby increasing the interest rate risk.