Question

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates.

Answer 1

Answer:

The correct answer is letter "B": unfavorably; increases.

Explanation:

As a measure to control inflation in the economy, the Federal Reserve (Fed) tends to increase the interest rate. This to have banks request fewer loans from the central bank which will result in offering fewer credits to individuals. If people have fewer sources of debt, the possibilities that an economic bubble -continuous increase in price due to continuous increase in demand- appear decreases.

However, if people have fewer sources of debt, private investment decreases, causing an unfavorable panorama for financial institutions offering large portfolios of assets.