Multiple choice
Markets · 4 min read
How interest rates affect valuations, bonds and M&A
"What would higher interest rates do to M&A?" is one of the most common commercial awareness questions. A strong answer links rates to valuations, financing and confidence.
Valuations
Higher rates raise the risk-free rate, which raises the discount rate. Future cash flows are worth less today, so valuations fall. Companies whose value lies far in the future, like high-growth technology firms, are hit hardest.
Bonds
Existing bonds pay a fixed coupon, so when new bonds pay more, their prices fall until their yields match. Longer-dated bonds move the most.
Deals
- Debt costs more, so private equity can borrow less and pay less in leveraged buyouts.
- Buyers and sellers disagree on price for a while, so deal activity often slows until expectations adjust.
- Buyers with cash or strongly valued shares can find opportunities when others can't finance deals.
How to structure your answer
- State the mechanism: higher rates mean a higher discount rate and more expensive debt.
- Give the effects: lower valuations, harder buyouts, slower deal activity.
- Add nuance: who benefits, and what the market might already expect.
Check you've got it
1/4