Interest rates are at the base of Corporate Finance; Government bonds, weighted average cost of capital, required rate of return, internal rate of return depend on the actual level of interest rate benchmark controlled by the Federal Reserve in United States, similar structures execute monetary policies in several countries around the world; but US interest rates are referred as the free-risk interest rates.
When the economy is overheating and inflationary pressures emerge, the FED increases the benchmark to cooldown the economy, this process resets the whole system up, for instance cost of capital increases, decreasing NPV of projects under evaluation in capital budgeting, discount rates (as cost of capital) for valuating purposes increase, bringing down prices for stocks in the FCF forecasting model, US treasury bond yield increases, sending up all nominal yields; in brief, interest rates are crucial in Corporate Finance.
And now we are at the end of an era, the rally in interest rates that it has happened during the last three decades, from 9.5% in the mid-eighties to 1.5% one year ago, is on the verge of breaking up.
New political tendencies around the world will lead to a receding in globalization trough changes in regulation, protectionism and re-leverage of armament between the most influential countries.
This will bring inefficiencies back in the economies that will open a path of inflation and therefore interest rates will go higher to new territory.
In the time frame of six months to one year and a half, the US treasury 10 years' bond will hit 3%, to open the door for a higher correction. This macroeconomic variable: interest rates will be in the center of every new evaluation of project in capital budgeting, in computing cost of capital, in the level on risk-free interest rate, in the spreads of corporate bonds, in assessing betas for companies, as they drift higher and higher in the next 5 to 10 years.
Question
How the concepts and/or skills provided could be used in the real world ?