Introduction
With regard to the investment a firm makes, there is the need of expanding the capital stock which was used for the purpose of financing some of the investment which was made on that duration. The reason for that is because the enterprise might be considering having using the funds they have in hand (McEachern, 2014). Conversely, there is the need of raising funds which are aimed at selling some the shares which are owned by the enterprise.
Summary
Considering the financial status of the company, it becomes possible to borrow some funds from some of the financial institutions. This entails complying with the need of selling and buying bonds. The idea behind that is because bonds are always used for the purpose of paying back some of the borrowed capital with time. Because of the liability that a firm incurs, there is the need of ensuring the firm has taken interest payment to associated institution to cater for them as they come due.
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Discussion
Despite the financial method which is being utilized in this case, one of the critical factors which need to be taken into consideration is the decision the firm makes. This takes into account the manner in which the institution acquires as well as holds capital and in return understanding the manner in which interest rates are acquired (Jorg, 2013). Basically, the intent of the interest rate entails determining what the firm acquires when it issues bonds or borrows money from other financial institutions.
Graphical Analysis
Y-axis
Interest
rates rE
X-axis
Quantity of laonable funds
rE= equilibrium interest rate
Regardless of the manner in which the institution uses its own funds to acquire capital, there exists the need of lending such funds to other financial institutions. The reason for that is because such institutions might have been purchasing their bonds directly or indirectly considering the transaction made. Conversely, even if the organization has the potential of utilizing the earned capital, the truth is that lending such funds is what makes the institution to be bankrupt (Jorg, 2013). It is the interest rates which have the capacity of offering the organization such funds so as to acquire extra capital other than dedicating them to other alternatives (Gregory, (2016). In this case, the rate of the interest the firm will be earning will be determined by the market share just the same way any product is valued, that is the forces of demand and supply.
Consequences
From the above illustration, it implies that the existing firm is the one in which lenders of funds and borrowers of the funds should have the potential of meeting their loanable funds market. By simplifying the role played by each sector, it implies that it is the interest rates which have the capacity of regulating the demand and supply in the market (McEachern, 2014). This will have to take into consideration the need of ignoring the differences which exists between the interest rates and what the firm receives in return in their economy.
Although the interest rates of the credit cards of such an institution might be relatively higher as compared to what other firms receive in the same industry, the activities the firm is paramount. There are various factors which affects the interest rates of a business organization. These include things like loan duration, riskiness of the loan, and the expense of administering the loan, and so on (Gregory, (2016). Nonetheless, due to the fact that our main focus is on the manner in which all these parameters affects the firm, it implies that the loanable funds of the firms and its consumers relies on its economies of scale.
References
Gregory, N. M. (2016). Brief Principles of Macroeconomics. Cengage Learning
Jorg, B. (2013). Routledge Studies in the History of Economics. Routledge Press
McEachern, W. A. (2014). ECON macroeconomics . Australia : South-Western Press
