Question

The two primary factors that affect interest rates on debt securities are Risk and Inflation. Explain the role of each factor in terms of capital decisions made in a healthcare organization.

Answer 1

Risk is a factor that influences the repayment of the debt and higher the risk , higher will be the interest rates. A higher interest rate will increase the cost of capital which in turn means that the organization will have to have higher cash flows to bear the cost.

Inflation will increase the interest rate as it decreases the purchasing power and will give lesser investment returns. Hence, the organization must invest in securities that can lesser the impact of inflation and provide higher returns.