How can a company best manage interest rate risk?
First, companies need to assess the impact on cash flow if interest rates were to rise and their tolerance to this risk. For example, a large company with significant cash flow relative to the amount of debt it has may be able to absorb, to a larger extent, the impact of rising interest rates. However, a highly leveraged company is going to be extremely sensitive to even a slight increase in interest rates. Regardless of the level of risk tolerance, companies should evaluate which financial tool may be best suited to limit this risk and not only minimize the impact on cash flow, but also maximize the predictability of future interest expense. What specific kinds of mechanisms are available? Three commonly used mechanisms, aside from the traditional fixed rate loans, are interest rate caps, interest rate collars and interest rate swaps. Interest rate caps limit the cost of floating rate debt for an upfront fee while maintaining the benefit of a drop in interest rates. Interest rate coll
