Business Math - advantages and disadvantages of higher interest rates Essay

Business Math - advantages and disadvantages of higher interest rates on investments - Essay Example Secondly, increase in interest rate has an effect to bond debt. When interest rate rises, after bonds are issued, bond prices fall. Government can use this strategy to buy back bonds, hence retire debt and free money in their budget to devote to other projects. Interest rate also affects risk aversion. When the interest rate is high, returns from normal savings cushions against riskier investments. The effect of this leads to more investors willing to work with these rates of return. Interest rates also affect equities, rising rate brings about higher borrowing costs, and this consequently impacts on the ability to spend. (Frankel, 2003) On the other hand, a disadvantage is that when interest rates are high, the following disadvantages are experienced. These occur in order to balance out the change. First, its expensive to borrow money, hence less money is available to buy goods. In effect, this will slow the growth rate of an economy. High interest rate can have effect on stock market, since less money is borrowed, the quantity of goods available from traders is less as they cannot afford to make more purchases. Loan borrowing by businesses is also reduced due to the cost incurred in borrowing. High interest rate also has a negative effect on credit cards, companies using credit cards will raise their rates respectively in order to balance with the interest rate changes (Frankel,