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Chapter 5: Q.12 (page 164)

Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.

Short Answer

Expert verified

If the stock brokerage commission reduces, the interest rate will fall.

Step by step solution

01

Introduction

A bond is a financial instrument that an entity issues in exchange for a return on investment. They used to be able to fund their business. The bond's return might be either fixed or variable.

02

Explanation

If the stock brokerage commission is reduced, the stock will become more appealing to investors than bonds, and the demand for bonds would be reduced. Because of the decrease in bond demand, the bond's demand curve will shift to the left. Because the bond's demand curve has shifted left, the price of the bond will rise while the interest rate falls, because the bond's price and interest rate are inversely related.

As a result, if the stock brokerage commission reduces, the interest rate will fall.

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