How does a rise in interest rates affect a business that relies on an overdraft?

The business pays more interest on the money it owes. Higher interest charges raise costs and reduce profit.

A business pays interest each year on a £50,000 loan at 5%. How much extra interest will it pay each year if the rate rises to 7%?

The business will pay £1,000 more interest each year. Interest rises from £2,500 (5% of £50,000) to £3,500 (7% of £50,000).

Why might a business delay expansion when interest rates rise?

A loan to fund expansion becomes more expensive. The expected profit from the project may no longer cover the higher interest.

How do higher interest rates affect consumer spending?

Mortgage and loan repayments rise, leaving households with less to spend. Savings accounts pay more, so people save more and spend less.

AQA GCSE Business 8132

Business in the Real World

Topic overview What a business is and why people start one Goods, services, needs, wants and factors of production Business sectors, entrepreneurs and a changing business environment Sole traders, partnerships, limited companies and not-for-profit organisations Business aims and objectives Why business objectives differ and change Stakeholders and their influence on businesses Factors affecting business location Business planning and basic financial terms Expanding a business and economies of scale

Influences on Business

Topic overview E-commerce and digital communication Ethics, the environment and sustainability Interest rates, employment and consumer spending Globalisation and exchange rates Employment, health and safety and consumer law Competition, risk and uncertainty

Business Operations

Topic overview Job, flow and lean production Managing stock: just in time and just in case Suppliers, procurement, logistics and supply chains Quality control, quality assurance and TQM Customer service and the sales process

Human Resources

Topic overview Organisational structures, span of control and delegation Recruitment, selection and contracts of employment Financial and non-financial methods of motivation Induction, on-the-job and off-the-job training

Marketing

Topic overview Identifying and satisfying customer needs Market segmentation Purpose of market research and primary and secondary research Market research methods and interpreting findings Pricing methods and factors affecting price New products, USP, brand image and the Boston Matrix Product life cycle and extension strategies Promotional methods and the promotional mix Channels of distribution, e-commerce and m-commerce The integrated marketing mix

Finance

Topic overview Sources of finance Cash flow and cash flow forecasts Financial calculations and average rate of return Break-even charts and margin of safety Income statements and statements of financial position Profit margins and judging financial performance

Influences on Business

Interest rates, employment and consumer spending

3 things to know
Both papers

Overview

Interest rates and the Bank of England base rate, borrowing costs worked through a loan example, delayed expansion, unemployment and recruitment, and how luxury and basic products fare when incomes fall.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

How does a rise in interest rates affect a business that borrows, and how much more interest will it pay on a £50,000 loan if the rate rises from 5% to 7%?

Key term

What is an interest rate?

Key term

Who sets the base rate of interest in the UK?

Questions from this subtopic

Each one with the model answer underneath.

1
What is an interest rate?
Model answer
An interest rate is the cost of borrowing money, shown as a percentage of the amount borrowed. Savers receive interest on money they deposit.
2
Who sets the base rate of interest in the UK?
Model answer
The Bank of England sets the base rate. Banks use the base rate to decide what they charge on loans and overdrafts.
3
How does a rise in interest rates affect a business that relies on an overdraft?
Model answer
The business pays more interest on the money it owes. Higher interest charges raise costs and reduce profit.
4
A business pays interest each year on a £50,000 loan at 5%. How much extra interest will it pay each year if the rate rises to 7%?
Model answer
The business will pay £1,000 more interest each year. Interest rises from £2,500 (5% of £50,000) to £3,500 (7% of £50,000).
5
Why might a business delay expansion when interest rates rise?
Model answer
A loan to fund expansion becomes more expensive. The expected profit from the project may no longer cover the higher interest.
6
How do higher interest rates affect consumer spending?
Model answer
Mortgage and loan repayments rise, leaving households with less to spend. Savings accounts pay more, so people save more and spend less.

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Business in the Real World

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AThe business pays more interest on the money it owes.

BHigher interest charges raise costs and reduce profit.

CThe business will pay £1,000 more interest each year.

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