Advantages
of Fixed Rate of Interest
One has to pay lower
interest, if the interest rate goes up, because interest rate is fixed, and
disadvantage of high rate will not be felt by the business.
Example
XYZ & Company borrowed
3 million at fixed rate of 10%. Interest rate for next year was 12%. Calculate
the interest & Advantage of XYZ Co.
Actual
Interest (10%) x 3,000,000 = 300,000
Market
Interest (12%) x 3,000,000 = 360,000
Advantage=
360,000-300,000 = $ 60,000
Disadvantage
of Fixed Rate of Interest
Disadvantage of fixed
interest rate is that you still have to pay fixed amount, where market is
offering lower rate. This can be explained with an example
Example
Ayza & Co borrowed 6
million @ 10% fixed rate; market rate for next year was 8%. Calculate the
interest and loss (disadvantage) to Ayaz & Co.
Actual
Interest Rate 6,000,000 x .10% = 600,000
Market
Interest Cost 6,000,000 x 8% = 480,000
Excess
cost 600,000-480,000 = $ 120,000
One have not planned for this extra $
30,000, therefore you may face some serious difficulties to arrange this $
30,000.
