Answer to Question #5857 in Finance for LaMarcus Streeter

Question

Financial Management (Explain how answer was reached)

2. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

a. Households start saving a larger percentage of their income.
b. The economy moves from a boom to a recession.
c. The level of inflation begins to decline.
d. Corporations step up their expansion plans and thus increase their demand for capital.
e. The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

Answer 1

d. Corporations step up their expansion plans and thus increase their demand for
capital would be most likely to lead to higher interest rates on all debt
securities in the economy. This means that the corporation expansion requires
more investments. Investors require the return on equity capital and as interest
rates are a major determinant in the demand for capital, they also rises.