Current Event - Discount rate

Current Event - Discount rate - incidence of borrowing Both...

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There have been an increasing number of news reports about the Fed increasing the Discount Rate before the end of the year. If the Fed does increase the Discount Rate, what possible effects could that have on: 1) Bonds – Current bond prices would sell at a discount and future bond prices should rise along with the interest rate. Higher interest rates include a higher premium for borrowing but also higher incentives to save. Bonds being much less risky than the stock market would see a rise in the number of investors due to future uncertainty. These would both tend to drive bond prices up. A third reason for bond prices to go up would be the increased private borrowing boy firms to avoid the high interest rates charged by banks. 2) Stocks – Stock prices should decrease due to the higher cost of borrowing money, or the lower
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Unformatted text preview: incidence of borrowing. Both of these should cause the bank to post higher profits in the future or slow their growth. This lag in growth would as expected be seen in the stock market through lower prices. 3) Bank loans – Due to the higher rate banks will be forced to borrow at they will likely increase the rate at which they lend money to borrowers. This should also cause customers to spend less money due to the lower amount of disposable income. Use and incorporate at least three sources, and list your sources. Sources: Money, Banking, and Financial Markets by Stephen G. Cecchetti, Second Edition, McGraw-Hill Irwin http://www.federalreserve.gov/pf/pdf/pf_complete.pdf http://www.federalreserve.gov/monetarypolicy/discountrate.htm...
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