Asked by joshy dallas on Jun 27, 2024
Verified
When the Fed buys government bonds on the open market,
A) the market rate of interest on government bonds are lowered AND the market rate of interest on corporate bonds are lowered.
B) the market rate of interest on corporate bonds are increased.
C) government yields drop but corporate yields rise.
D) government and corporate yields rise.
Government Bonds
Debt securities issued by a government to finance its expenditures, often considered a safe investment.
Market Rate
The prevailing interest rate available in the marketplace for loans or savings, often influenced by the central bank's policies, supply and demand, and other economic factors.
- Acknowledge the consequence of the Federal Reserve's engagement in open market transactions, including the trading of government securities.
Verified Answer
HK
Harshit KothariJun 29, 2024
Final Answer :
A
Explanation :
When the Fed buys government bonds on the open market, the increased demand for government bonds leads to a decrease in their market rate of interest. This decrease in government bond yields, in turn, lowers the market rate of interest on other fixed-income securities, such as corporate bonds. Therefore, both the market rate of interest on government bonds and corporate bonds are lowered.
Learning Objectives
- Acknowledge the consequence of the Federal Reserve's engagement in open market transactions, including the trading of government securities.