Relevance of Prime Interest Rate
Using the corporation you selected in Lesson 6 Discussion Question 1 and the financial analysis information in your text for reference, discuss the relevance of the prime interest rate, gross domestic product, and gross national product to your corporation and its industry.
The prime rate pertains to the interest that the commercial banks charge their most creditworthy clients, often large organizations. On the other hand, the prime interest rate also referred to as the prime lending rate, is mainly calculated by the federal funds rate representing the overnight rates that most banks apply to in lending to other companies. The prime is considered to form the foundation and the beginning point for various other interest loans, such as rates for small business loans, mortgages, and personal loans. However, the prime could not be particularly cited as the attribute of the ultimately charged rate. The terms of such loans are usually expressed as the prime plus a specific percentage, which relies on the borrower’s credit rating and other parameters (Chen, 2020). Therefore, the main significance of the prime interest rate is that it offers a technique to cover the costs linked to the lending, and it acts as reimbursement for all the risk presumed by the creditor based on the credit history of the borrower and other different fiscal details.
According to Bloomberg (2018), Sturm, Ruger & Company borrowed and secured about a 40M line of credit through Wells Fargo back in 2018. Such a deal would have given the organization a revolving line of credit of up to $40 million, offering a $10 million sub-limit for the letters of credit. Further, the advances structured under the line of credit could be utilized for general business purposes. The credit facility is available to the organization, offering that no event of default under the credit agreement should have occurred and continued. The firm would repay the loans entirely or partially, offering that LIBOR rates loans could be subject to the prepayment fee (Powell & Meloni, 2018). The LIBOR is the average interbank interest rate to which a selection of the bank on the London money market are arranged for lending purposes.
The gross domestic product is among the most common indicators applied in tracking the health of a country’s economy. The calculation of a nation’s GDP mainly considers numerous parameters regarding its economy, including investment and consumption (Tacchella, Mazzilli & Pietronero, 2018). Sturm, Ruger & Company reported an accumulative revenue increase within the first quarter of 2020 by about 8.42%. In contrast, most of its rivals have experienced a reduction in revenue by approximately -7.12%, recorded within the same quarter. In the same period, the company’s net income increased by about 17.69%, while several of its rivals experienced a decrease in their net income. Further, with the revenue growth of 8.42% in the overall firm, Sturm, Ruger & Company attained enhancement in the market shares in its general company finance by 7.98%.
On the other hand, the gross national product, GNP, is an estimation of the accumulative amount regarding the concluding services and products received in a particular timeframe through returns on various assets possessed by a nation’s residents. The GNP is mainly determined by calculating the summation of all the individualized consumption expenditures, government expenses, the private domestic asset, the net exports, and all other income earned by the residents from different abroad assets, and deducting all the earned income in the domestic economy by foreign residents (Al-Bakr & Al Salman, 2016). Further, the net exports mainly show the distinction between what the nation exports minus the imports of the services and goods.
