Question

Australian corporate bonds can now be issued with the same prospectus as for previous issues, simplifying the process.

As a result, the corporate bonds' yield __________ while the stock of bonds in the financial system ___________.

A.

increases; decreases

B.

increases; increases

C.

decreases; increases

D.

decreases; decreases

Answer 1

Let's think how this decision affects the demand for and supply of money.

The revision in bond issue requirements has simplified the process of raising additional debt capital. It is thus easier now for corporations to access the bond markets when they require additional debt capital. This should result in an increase in corporate bond issues and, hence, an increase in the stock of bonds in the financial system.

At the same time, this increase in issues means there are a higher number of bond issuers (corporations) chasing investors' money at any point in time. Thus, there is a higher demand for money. (We can reasonably assume that this decision does not affect the supply of money.) In such a case, we would expect that debt investors will demand a higher interest rates on their bond investments (simply because there are many more people asking for the investors' money.)

Thus, the corporate bonds' yield will increase; while the stock of bonds in the financial system will also increase.