| Course | FAM-5400 Finance and Accounting for Managers |
|---|---|
| Module | Module 5 |
| Paper type | Written assignment 5: financial markets and interest rates |
| Length | About 658 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Science in Management |
| Updated | October 2026 |
Free sample paper for FAM 5400 Module 5
Fixed or Floating? Interest Rate Risk in a Glassware Maker's Equipment Loan
Student Name
Master of Science in Management, Thomas Edison State University
FAM-5400: Finance and Accounting for Managers
Mentor Name
Month Day, Year
Fixed or Floating? Interest Rate Risk in a Glassware Maker's Equipment Loan
How Financial Markets Set Rates
Financial markets move money from savers to borrowers, directly through securities markets or indirectly through banks. Keown et al. (2020) explain that the nominal rate a borrower pays can be understood as a sum of compensations: a real risk-free rate for postponing consumption, an inflation premium for expected loss of purchasing power, a default risk premium, a maturity premium for tying money up longer and a liquidity premium for assets that are hard to sell. Fisher (1930) first set out the relationship between nominal rates, real rates and expected inflation that underlies the second component.
The breakdown is illustrative, but it shows why Millville pays far more than the government: most of the gap reflects the bank's view of the company's credit and the loan's illiquidity, not the general level of rates.
| Component of Millville's fixed 7.4% quote | Illustrative size |
|---|---|
| Real risk-free rate | 1.5% |
| Expected inflation premium | 2.5% |
| Maturity premium for five years | 0.6% |
| Default risk premium for a mid-sized private borrower | 2.3% |
| Liquidity premium, since the loan cannot be traded | 0.5% |
| Total | 7.4% |
What the Yield Curve Says
The yield curve plots yields on government securities of different maturities at one moment. Usually it slopes upward, reflecting a maturity premium and expectations that rates will stay level or rise. When short-term yields exceed long-term yields, the curve is inverted, which markets read as an expectation that rates will fall, often because a slowdown is expected. Estrella and Mishkin (1998) found that the spread between long and short Treasury yields was among the most reliable predictors of U.S. recessions.
For Millville, the curve's shape bears directly on the choice. If the curve is upward sloping, a fixed rate costs more today than the floating rate but protects against expected increases. If it is inverted, the floating rate may start higher but is expected to fall, which favors floating for a borrower who can tolerate uncertainty.
Comparing the Loans With Present Value
The fixed loan carries payments of about $32,000 a month for 60 months. The floating loan's payments reset each year with the benchmark. Assume the benchmark today is 5.0 percent, so the floating rate starts at 7.25 percent, slightly below the fixed rate. Three rate paths illustrate the risk:
Discounting each path's payments at the company's own cost of borrowing gives the same ranking: floating wins if rates fall or stay flat, fixed wins if they rise. The difference between the best and worst floating outcomes, about $105,000 over five years, is the interest rate risk Millville would carry.
| Benchmark path over five years | Average floating rate | Total interest, floating | Total interest, fixed at 7.4% |
|---|---|---|---|
| Falls by 1.5 points | about 6.3% | about $270,000 | about $320,000 |
| Stays at 5.0% | 7.25% | about $313,000 | about $320,000 |
| Rises by 2 points | about 8.6% | about $375,000 | about $320,000 |
The Decision
The choice depends less on forecasting rates, which markets already reflect in today's yield curve, than on how much uncertainty the company can afford. Millville's 2026 budget is built around a cash target, its interest coverage is moderate and it has just drawn on a bank line. An unexpected rise in rates would arrive when the company is least able to absorb it. The fixed loan costs about $7,000 more than floating if rates stay flat, a modest premium for certainty. A middle course, fixing most of the loan and floating a portion, is also available, but for a company rebuilding its cash, paying a small premium to remove the risk is reasonable.
Conclusion
Interest rates combine compensation for time, inflation and risk, and the yield curve shows what markets expect. A manager's task is not to beat those expectations but to choose how much exposure to accept. For Millville, the time value of money shows the floating loan is slightly cheaper on average and the fixed loan safer, and the company's position favors safety.
References
Estrella, A., & Mishkin, F. S. (1998). Predicting U.S. recessions: Financial variables as leading indicators. Review of Economics and Statistics, 80(1), 45-61. https://doi.org/10.1162/003465398557320
Fisher, I. (1930). The theory of interest. Macmillan.
Keown, A. J., Martin, J. D., & Petty, J. W. (2020). Foundations of finance (10th ed.). Pearson.
What the FAM 5400 Module 5 instructions ask for
Module 5, Financial Markets and Interest Rates, addresses the course objective on how interest rates and the time value of money affect a manager's decisions. The module asks for a short paper. Expect to explain how financial markets and institutions channel funds, what determines interest rates, how to read the yield curve and how time value of money calculations support decisions such as borrowing, leasing or investing. The company, loan quotes and rate paths here are composites; your own prompt may set the figures, and the course stresses interpretation over arithmetic. Expect questions on how markets set interest rates, what the yield curve shows and how to compare loans using present value.
How the FAM 5400 Module 5 example is put together
The paper opens with how markets set rates and breaks one actual quote into its components in a table, with Fisher cited for the inflation link. Its yield curve section covers upward and inverted curves, the research on inversion before recessions and what each shape says about fixed or floating. A second table compares total interest on the two loans under three rate paths, and the decision section weighs the cost of certainty against the company's capacity to absorb risk, ending with a recommendation and a middle option. The decision section weighs the cheaper loan against the risk it carries.
Reading the FAM 5400 Module 5 grading rubric
The interest rate paper is scored from 0 to 100 and counts among the seven written assignments that make up 45 percent of FAM-5400. Credit goes to an accurate breakdown of what sets a rate, sound time value arithmetic and a choice the numbers support. Because the course emphasizes application, connecting market concepts to a specific managerial choice is where most credit is earned. Recognizing that the right answer depends on the firm's capacity for risk, not only on expected cost, shows financial judgment. Mentors give credit for correct present value comparisons and for reading the yield curve in terms of the borrowing decision. Papers that show the loan payment under both options and the break-even rate at which floating would cost more show the analysis the module expects.
FAM 5400 Module 5 help: mistakes that cost marks
Interest rate papers lose credit for explaining the yield curve without connecting it to a decision, for choosing a loan on today's rate alone and for presenting time value calculations without interpreting them. Break the rate into its parts and say which ones the company can influence. Read the curve's shape for what it implies about future rates. Before choosing, cost out the fixed and floating annealing-oven loans under three rate paths, rising, steady and falling. A free first sample of your own FAM-5400 Module 5 paper is available on request. Show the cash flows of each loan before discounting them, so the comparison is easy to check. Finish with the choice in a single sentence.
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FAM 5400 Module 5 questions, answered
Where can I find a free FAM 5400 Module 5 sample paper?
The glassware maker's fixed-versus-floating loan paper above breaks down interest rates, reads the yield curve and compares two loans under three rate paths.
What makes up a nominal interest rate?
The real risk-free rate, plus amounts for expected inflation, default, maturity and liquidity.
What does an inverted yield curve mean?
Short-term yields exceed long-term yields, usually signaling that markets expect rates to fall, often ahead of an economic slowdown.
When is a fixed-rate loan better than a floating one?
When rates may rise or when the borrower cannot afford the uncertainty of higher payments.
How does the time value of money affect borrowing decisions?
It lets managers compare loans with different payment patterns by converting them to present values at a common rate.