Suppose the Money Market Has an Equilibrium Interest Rate of 5

question 532

Multiple Choice

Suppose the money market has an equilibrium interest rate of 5 percent. If the actual interest rate is 3 percent, which of the following occurs to bring the money market back to equilibrium?

• A) People buy bonds, the price of bonds rises and the interest rate rises.
• B) People buy bonds, the price of bonds falls and the interest rate rises.
• C) People sell bonds, the price of bonds rises and the interest rate rises.
• D) People sell bonds, the price of bonds falls and the interest rate rises.

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Definitions:

Underwriters

Financial professionals who assess the risk and establish the price of securities in initial public offerings (IPOs) or other securities offerings.

Roadshow Presentations

Series of presentations made by the management of a company planning to go public or issue new securities, aimed at potential investors across different locations.

Prospectus

Summarizes information about a new security issue and the issuing company.

Best Efforts Deals

An agreement where an underwriter commits to sell as much of an offering as possible to the public, without guaranteeing the entire issue will be sold.