When the Government Runs a Deficit, the Interest Rate Tends

question 77

Multiple Choice

When the government runs a deficit, the interest rate tends to:

• A)rise.
• B)fall.
• C)remain unchanged.
• D)rise or fall, depending on how the deficit is financed.

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Definitions:

Annual Coupon

The yearly interest payment made to bondholders, typically expressed as a percentage of the face value.

Bankruptcy Claims

Rights to payment held by creditors from a company undergoing bankruptcy proceedings.

Debt/equity Ratio

The proportionality ratio of debt to equity in the context of funding a company's assets.

Optimal Capital Structure

The best mix of debt, equity, and other financial instruments that maximizes a company's value while minimizing its cost of capital.