Question

Harris Bank’s Chief Economist is forecasting a substantial decrease in money market interest rates over the next 4 weeks. Assuming the Chief Economist is correct in her forecast, what would you recommend to Harris Bank’s funds management department regarding how and where to raise the money needed? Explain why you make this recommendation.

Answer 1

If there is a substantial decrease in the money market interest rates over next few weeks, I would be advising the bank to raise money through the money market instruments because this money market instruments are mostly debt instruments which will be helpful in in expansion and the growth of the company in the short run and long run as well, and I would be trying to advise the management of the company to borrow the long term loan which would be mostly taken on a lower rate of interest so the bank will be able to to help itself in making a higher amount of profit because it has borrowed at a lower rate of interest.

These money market instruments are intended for generating funds for the business in generally shorter period through commercial papers for short term & treasury bills so the bank which is in dire need of short term funds would be trying to raise the working capital through the money market instruments, which has gone cheaper because of decrease in the interest rates so those banks should be trying to benefit according to their needs due to the decrease in the interest rate in the money market.