Question

Please help explain how the answer was achieved!

Interest rates are important to financial institutions since an interest rate increase ___ the cost of acquiring funds and ___ the income from assets. Increases; increases

Compared to interest rates on long-term US government bonds, interest rates on ___ fluctuate more and are lower on average. Three month treasury bills.

Typically, increasing interest rates; discourages corporate investments.

Answer 1

Answer:

• Interest rates are important to financial institutions since an interest rate increase increases the cost of acquiring funds and increases the income from assets.

Why: interest rates affect the cost of borrowing, the return on savings and are a prominent component of the total return of many investments. However, it gives vision into future economic and financial market activity. So, it is clear that an interest rate increase increases the cost of acquiring funds and increases the income from assets.

• Compared to interest rates on long-term US government bonds, interest rates on three- month treasury bills fluctuate more and are lower on average.

Why: The reason for the higher interest rates in case of long-term government bonds is the risks associated with time which is not in the case of three-month treasury bills.

• Typically, increasing interest rates discourages corporate investments.

Why: Higher interest rates increase the amount of interest payment, and makes borrowing costly. So costly borrowings discourage corporate investment.