When considering the appropriate amount of variable rate debt, which risk factors should be evaluated?

The appropriate amount of variable rate debt should be assessed by evaluating a comprehensive range of risk factors, which prominently includes balance sheet risk, interest rate risk, and others.

Balance sheet risk pertains to how the company's liabilities and assets are structured, particularly the impacts of variable rate debt on the overall financial health and stability of the organization. Effective management of this risk ensures that the debt structure aligns with the organization's financial strategy and operational capabilities.

Interest rate risk is central to variable rate debt management. Fluctuations in interest rates directly affect the cost of borrowing and can lead to increased expenses if rates rise, potentially impacting cash flows and the ability to service debt.

Evaluating additional factors, such as liquidity risk, is also essential. Liquidity risk assesses the organization's ability to meet its short-term obligations, particularly if cash flows are adversely impacted due to rising interest rates. By considering a wider array of risks, including market conditions and other financial impacts, a more holistic and effective debt management strategy can be developed, enabling better preparedness for economic fluctuations and interest rate changes.

In sum, focusing solely on a single type of risk, such as only interest rate risk or only reissuance risk, limits the understanding of the full financial picture and may lead to inadequate risk