Chapter 28, Problem 4MCQ

To determine

True statement regarding short-term interest rates and long-term interest rates.

Explanation of Solution

The short-term interest rate is the interest rate which is short-term borrowings between financial institutions and short-term government bonds issued and traded in the market. Short-term interest rates are average daily interest rates measured in percentages. Where available, short-term rates are based on 3-month money market rates. Standardized terms are "money market rate" and "Treasury bill rate".

A long-term rate of interest is a government bond with a tenure of 10 years. Interest rates are calculated by the price charged by the lender, the risk of the borrower, as well as the decline in capital value. Long-term rates of interest are average daily rates measured in percentage. These rates are derived from the price at which government bonds are traded in the financial markets, not at the rate at which the loan was issued. Both cases relate to bonds whose repayment of principal is guaranteed by the government. The long-term rate of interest is measurable of commercial investment. Low long-term interest rates encourage capital investment, while high-interest rates encourage sales. Similarly, investment is an important source of economic growth.

Therefore, the correct option is C.