Question

The interest rates on short-term bonds of similar maturities move together because:

	a.	these instruments are complements.
	b.	these instruments are substitutes.
	c.	the supply is relatively inelastic.
	d.	the supply is relatively elastic.
	e.	they have the same amount of default risk.

Answer 1

The interest rates on short term bonds of similar maturities together because they are substitute and if the interest rate of one decreases, then other bond is forced to do decrease else the market share will be shifted to another due to the substitution effect.

Therefore (b) is the answer

They are not complements because the increase sale of one is not dependent on the increase sale of another

Therefore (a) is wrong

they are not elastic because the interest rates change and they are not inelastic because the quantity purchased varies from one to another and risk is not considered here

Therefore (c,d,e) are wrong