Explain why lower long-term interest rate is desirable

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Reference no: EM131839899

Say the city of Tucson now has an annual budget of $400 million, and by city charter, it cannot spend more than 10% of its budget on debt service, including both principal and interest payment. The city’s existing annual debt payment is $30 million. Suppose the city needs to borrow $140 million for a capital project, and the debt will be paid back over 20 years with equal annual payments. If the current interest rate is 5% for a 20-year loan, can the city afford this new debt? Suppose the current interest rate now has dropped to 3%, can the city afford the debt now? Please use this example to explain why lower long-term interest rate is desirable in the face of a weak economy.

Reference no: EM131839899

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