Firm A has assets that are mainly in financial securities and whose liabilities carry variable interest rates; Firm B has the same assets as Firm A and the same amount of liabilities but its liabilities are all at fixed interest rates. If the central bank lowers interest rates, everything else constant:

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Quizplus · Accepted Answer

When the central bank lowers interest rates, the value of financial securities typically increases, benefiting both firms. However, Firm A, with variable interest rate liabilities, will see its interest expenses decrease, further increasing its net worth. Firm B's fixed interest rate liabilities mean its interest expenses remain the same, so while its assets increase in value, the increase in net worth is less pronounced than in Firm A.

Firm a Has Assets That Are Mainly in Financial Securities