How Much Does a 1 Percentage Point Rate Rise Increase Interest Expense?
Calculate additional interest expense by distinguishing floating-rate debt from fixed-rate debt maturities. This case also considers rate reset dates, refinancing, interest income, and hedging.
A simple calculation multiplies the debt exposed to the rate change by the rate increase and the period it applies. Rather than applying the change to all debt at once, distinguish floating-rate debt, fixed-rate maturities, and rate reset dates.
Distinguish 1% from 1 percentage point
A borrowing rate rising from 4% to 5% increases by 1 percentage point. The relative increase from the initial rate is 25%, but the additional-expense formula uses 0.01. A policy-rate announcement also does not immediately pass through to every borrowing rate by the same amount. Check the contractual benchmark, credit spread, and reset frequency and incorporate them into the calculation. If credit quality deteriorates, the spread can rise even when the benchmark is unchanged, so macroeconomic rate forecasts alone do not explain a company’s borrowing costs.
Group debt by maturity
Separate the current floating-rate balance, fixed-rate debt maturing during the year, and fixed-rate debt maturing later. If repayments and new drawdowns are scheduled during the year, balances for each period are more appropriate than the year-end balance. Interest-rate swaps and other contracts can change the economic rate exposure, making the nominal floating-rate share misleading. Check the size of the exposure in IFRS 7 financial-risk disclosures and debt notes, but distinguish reporting-date sensitivity from the forecast of actual interest payments over the next year: the calculations serve different purposes.
Show pretax expense separately from the effect on net income
Additional interest expense is a pretax amount; the after-tax effect depends on actual deductibility and tax-rate conditions. Do not assume that applying a simple tax rate to a loss-making company creates immediate cash tax savings. Also examine the net interest burden, since interest income on cash equivalents may rise at the same time. For items where current-period expense differs from cash paid, such as borrowing costs relating to assets under construction, check the company’s accounting policy. Assessing payment capacity requires considering principal repayments alongside expected interest for the same period.
Worked example
Hypothetical example: Of total debt of KRW 100 billion, assume KRW 40 billion is floating-rate debt whose rate rises by 1 percentage point at the start of the year, while KRW 20 billion is fixed-rate debt refinanced in July at a rate higher by the same amount. The rate on the remaining KRW 40 billion is unchanged. Additional annual interest is KRW 40 billion × 0.01 + KRW 20 billion × 0.01 × 0.5 = KRW 500 million. This is less than the KRW 1 billion obtained by applying 1 percentage point to the whole balance. If interest income on KRW 10 billion of cash increases by KRW 100 million annually from the same starting point, the simple increase in the net interest burden is KRW 400 million. The calculation excludes hedges, taxes, and fees.
What to check
- Confirm that the rate change is expressed in percentage points.
- Separate fixed- and floating-rate balances and their reset dates.
- Reflect the number of months applicable after each refinancing date.
- Assess interest income, hedges, and principal repayments separately.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.