Please answer question 5 fully and please answer all parts S

Please answer question 5 fully and please answer all parts. Show work and steps of how you obtained answer and please bold final answer. Thanks in advance.

Solution

a. SInce the long term yields have declined, it signifies that the demand for funds in the longer tenure bucket decreased. As per the Market Segmentation theory, the demand supply in a particular tenure buckets determines the interest rates in that bucket. Hence we can argue that the demand from corporates for long term funds would have decreased in the last 6 months.

b. The shifting yield curve signifies that market expects the future rates to be lower which could also be one of the reasons for the some of the corporate demand to be deferred in wait (and to benefit) for the reduced interest .

c. If the borrowers (and corporations) expect a recession in near future, this would mean that they are pessimistic about their business prospects and hence they would delay or cancel fresh business investments which will reduce the demand for funds overall in the economy leading to relatively lower interest rates. Also there could be some companies who may believe that a down turn can adversely impact / stress their repayment capability and hence they may not want to borrow more.

d.The shift in the yield curve leading to inverted curve indicating a recessionary period would result in lenders trying to lock into rates before they fall further however at the same time they would also be concious of the credit risk and would move to higher rated bonds. Due this the corporate borrowers with lower rating especially non-investment grade rating will see maximum impact.