- As the treasurer of a financial institution, your task is to forecast the direction of interest rates. You plan to borrow funds and may use the forecast of interest rates to determine whether you should obtain a loan with a fixed interest rate or a floating interest rate. The following information can be considered when assessing the future direction of interest rates:
¨ Economic growth has been high over the last two years, but you expect that it will belowover the next year.
¨ Inflation has been 4 % over each of the last few years, but you expect that there will be “deflation” over the following year.
¨ The U.S. Treasury has no plans toissue T-bonds.
¨ The Federal Reserveis expected to use open market operations to buy $ 300millions worth of T-notes
Given the preceding information
- Determine how the demand for & the supply of loanable funds will be affected (if at all)? Do they increase or decrease?
|Economic growth||Inflation||U.S. Treasury||Federal Reserve|
- Will the purchase of T-note of $lead to an increase or decreasein the money supply?
- What about the market interest rates? Do you expect the market interest rates to increase or decrease? Why do you think so?
- As the treasurer of a financial institution, you plan to borrow money. You can obtain a one-year loan at a fixed-rate of 8% or a variable-rate loan that is currently at 8% but would be revised every month in accordance with general interest rate movements. Which type of loan is more appropriate based on the answer C? Why do you think so?