Question

2a.)There was an abrupt decline in market interest rates and Northern State Bank’s stock price went up. Explain why that happened.

b.)When the Treasury issued a lot of new bonds (flooded the market with bonds) what effect could we expect in the Treasury bond market and the corporate bond market?

Answer 1

2a). The abrupt decline in market interest rates prompted investors to move their money into the equity market in order to get better returns.In this case investors had purchased stocks of Northern State bank. The sudden rise in demand caused the prices to go up.

2b). When Treasury issues lot of new bonds in the bond market the corporate bond market would see heavy selling and thus existing corporate bonds would be available at a discount.The borrowing cost of corporate's would significantly rise in the bond market., on the other hand there would be heavy buying in the Treasury bond market as treasury bonds are far less riskier than corporate bonds.