Imagine a planet where someone turns off gravity for 15 years. During this time, people get used to effortlessly flying around. But then gravity suddenly returns. Those accustomed to flying everywhere now need to navigate a weighted existence on the ground — and relearn basic skills such as walking. Walking may seem like a rudimentary activity, but if people don’t do it for 15 years, muscle memory fades.
Managers Need to Relearn How Interest Rates Work
As rates rise, outdated thinking can lead to costly conclusions.
October 05, 2023
Eric Raptosh Photography/Getty Images
Summary.
In the United States, short-term interest rates have been near zero for most of the last 15 years. With cost of capital this low, many managers have paid scant attention to the time value of money — an essential concept in doing financial analysis. Now, with short-term rates above 5%, older managers need to brush off their instinctive feel for how capital costs affect investment prospects — and a younger generation of managers needs to learn these skills for the first time.