Question

You are a financial consultant. At various times you heard the following comments on interest rates from one of your clients. How would you respond to each comment? (a) “A double A rated bond issue should offer a lower yield than a single A rated bond issue of the same maturity.”

(b) “If there is an increase in the money supply, the level of interest rates must decrease.”

Answer 1

A. A double rated bond should have lower yield than the single A rated bond because of the risk associated. AA rated bond has lower risk than the A rated bond. And higher the risk higher is the return required.

B. If the money supply increases in economy, that means the supply is increasing while the demand is not that much increasing. So as per the demand supply concept, the demand and supply should match and for that the interest rate decreases to match the supply with demand