Given a firm's liabilities, an increase in interest rates reduces the firm's net worth because:

Question

Quizplus · Accepted Answer

An increase in interest rates will result in higher interest costs for the firm, which will reduce its profits. This reduction in profits will, in turn, reduce the firm's net worth. The other options (B and C) are incorrect because an increase in interest rates does not necessarily lead to higher asset values or an increase in the principal amount of the loans.

Given a Firm's Liabilities, an Increase in Interest Rates Reduces