• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

April 2015 Q5 (i)

A

AKS01

Very Active Member
Hi,

It states that the return on alternate assets will impact the short term interest rate. Is this because a higher return on alternate assets will reduce demand for money market instruments, and could lead to a reduction in interest rates (to encourage borrowing/lending)?

Thanks
 
Hi AKS01

Short-term interest rates are basically the return on money market investments. These are short-term low-risk investments. Alternative (ie similar) investments to these will be short-term government bonds for example. If returns increase on these government bonds, then demand for these government bonds is likely to rise and demand for money market instruments is likely to fall, all else being equal, as investors move towards the higher returns.

Assuming the issuers of money market investments want to continue borrowing at the same level, they'll then need to make these instruments more attractive relative to government bonds. To do this, the central bank may increase short-term interest rates (ie the return on the money market investments).

In this way, the return on alternative asset classes (government bonds here) could impact on the level of short-term interest rates.

I hope this helps.
 
You must log in or register to reply here.
Back
Top