Risk of default influence the rate of interest, Financial Management

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Q. Risk of default influence the rate of interest?

The bank offering the loan to Blin will make an assessment of the risk that the company might default on its loan commitments and charge an interest rate that reflects this risk. Ever since Blin is listed on a stock exchange it will be seen as less risky than an unlisted company and will pay a lower interest rate as a result. The period of time so as the company has been listed may as well be an influential factor.

Since Blin has expanded sales considerably and relies heavily on overdraft finance it may be in an overtrading situation. This could raise the risk of default and so increase the rate of interest charged on the loan. The bank would require to be convinced through financial information supporting the loan application such as cash flow forecasts that Blin would be able to meet future interest payments and repayments of principal.


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