I accept the truth of the corruption post-‘Soviet’ Union (indeed its nascent form was in evidence well before then). Not one group of kleptocracts replaced by another which appears to be the practice since the fall of the Wall. It would be beneficial that the replacing is done by Russian people and FOR the Russian people. Somebody/something could try to replace them. I believe they’ll get into trouble rather soon. In short, high interest rates disincentivize investment. So issuers of equity have to take a cut similar to issuers of debt.
So with high rates, firms with retained earnings will simply decide to hold bonds or keep funds in a CD instead of investing in capital intensive projects.īy the same logic, as bond yields rise, the only way to make equity attractive is to lower the share price, to bring equity returns in line with bond returns. So projects that are rational to undertake at low interest rates become rational to forgo at higher rates. The higher the baseline interest rate, the lower the NPV of all of projects.
The cash flow one period is divided by 1+r, the cash flow in two periods by (1+r)^2, etc, where r is the safe interest rate. the return that can be earned on a safe alternative fixed income investment. The idea of NPV is that future cash flows are discounted by the cost of capital, i.e. When deciding to undertake an investment project, the decision rule is whether the Net Present Value of the stream of net income to be generated is positive. I understand your reasoning, but there is something else to consider.
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