Question

Explain what the following statement means: “Bonds should be issued only if the potential increase in interest rates is attributed to a strong demand for loanable funds RATHER than the FED’s reduction in the supply of loanable funds.”

Answer 1

If FED is reducing supply of loanable fund it means that it is trying to reduce inflation by restricting supply of money in hands of people, in such case the company who had issued bond will not be able to fully utilise its capacity. On other hand if potential increase in interest rates is attributed to a strong demand for loanable funds then it can be say that there is strong economy ,which would result in strong demand of the products of the company.

Thus Bonds should be issued only if the potential increase in interest rates is attributed to a strong demand for loanable funds RATHER than the FED’s reduction in the supply of loanable funds