Loans and Bonds

Overview

Duration: 10/2017-06/2020

Agenda

In the current low interest rate environment caused by the monetary policy measures the ECB has set over the past decade, choosing the optimal debt instrument and restructuring existing debt is of great importance.

Due to the currently negative 6M Euribor rates, the interest rate for variable-rate loans are lower than ever. At the same time, longer-term interest rates, which are used as benchmarks for fixed-rate debt instruments, are also at historically low levels. This has created an environment in which restructuring existing debt can be beneficial under specific circumstances. Moreover, when new debt is to be taken on, it is crucial to define a criterion upon which the choice between variable and fixed-rate instruments can be made. Since interest rates are expected to rise again, this criterion should take into account expected future interest rates.

The present project is joint work between the FiRe members Edwin O. Fischer, Lisa-Maria Kampl and Ines Wöckl. In the project, they determine numeric and closed-form solutions for the upper limit on the nominal interest rate of new debt instruments up to which debt rescheduling is advantageous. They also define two criteria which can be used to make an optimal decision when choosing between fixed and variable interest debt instruments. Finally, they lay out the process and importance of calculating expected future interest rates.