Reference no: EM133635869

Question: When trying to secure a local bond for improvements in a healthcare facility that is not run for profit, a member of the finance team could run into difficulties such as loan problems, the risk of fluctuating interest rates, and fluctuating bond values. The inverse link between interest rates and bond prices is the first thing that a member of the finance team of a buyer representing a not-for-profit organization should be familiar with. Bond prices tend to go up whenever interest rates go down. On the other hand, a general downward trend in bond prices follows an increase in interest rates. When interest rates fall, this results from investors attempting to "capture" or "lock in" the greatest possible rates for as long as possible in order to maximize their profits. In order to accomplish this goal, they plan to purchase pre-existing bonds that offer a greater interest rate than the rate that is currently offered on the market. The price of bonds goes up in response to a rise in the demand for them. Another risk that members of the finance team of a non-profit organization are exposed to is the possibility of reinvesting the organization's revenues at a rate that is lower than the rate at which the funds were originally obtained. When interest rates go down over a period of time and issuers of callable bonds decide to cash in their bonds, this is one of the primary ways that this risk manifests itself. Other ones include the risk of inflation and the term of the bond. When a member of the financial team of a charitable organization purchases a bond, they are essentially making a commitment to receive a rate of return, which can either be fixed or variable, for the duration of the bond or for as long as it is kept.

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