Definition
Interest rate sensitivity shows how changes in rates affect interest expense and cash flow, especially for floating-rate debt.
Formula
Interest change = floating debt balance * rate change
Example
If floating debt is $5M, a 1% rate increase adds $50k annual interest.
How to use it
- Model multiple rate scenarios to stress-test coverage.
- Consider hedges if rate exposure is large.
Common mistakes
- Ignoring base rate floors or caps in the debt agreement.
- Using ending debt balance instead of average balance.
Measured as
Interest change = floating debt balance * rate change
Misused when
- Ignoring base rate floors or caps in the debt agreement.
- Using ending debt balance instead of average balance.
Operator takeaway
- Model multiple rate scenarios to stress-test coverage.
- Consider hedges if rate exposure is large.
- Tie Interest Rate Sensitivity to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Loan amortization: how monthly payments and total interest work if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Interest Rate Sensitivity belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Loan amortization: how monthly payments and total interest work: A practical guide to loan amortization: monthly payment formula, why interest dominates early, and how term and rate affect total interest.
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.