About PD and interest rate

[lynnding2016]

Hi, I am confused that why it is true that when interest rate increases, the firm's value will increase and thus the PD will decrease?
Please help me , really confusing about it

 

[Lu Shu Kai FRM]

Hi @lynnding2016 ,

Can you provide some context? There could be alot of reasons for this. My understanding from a macro perspective is that when interest rates increases, it is a sign of the central bank trying to control inflation. Healthy inflation is usually a sign of a good economy that means business is good for firms. This causes the firm value to increase and its financials to improve, which allows it to more easily pay off debt that decreases its PD.

Hope this is helpful.

 

[lynnding2016]

Thanks so much , i think that make sense