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  • Lahore School of Economics Intro To Capital Markets: Quiz 2

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    The document is a case study about Carson Company, which has substantial loans with interest rates tied to market rates. Carson is expecting growth and needs more financing. It closely monitors the Fed since it has large debt exposure. Carson's service alerted it that the Fed has been selling large holdings of Treasury securities. (a) The Fed selling Treasuries will place downward pressure on their prices and upward pressure on their yields, since increased supply leads to lower prices and higher yields. (b) The Fed selling will place upward pressure on Treasury yields, as greater supply of Treasuries will increase their yields. (c) The Fed selling will place upward pressure on interest rates more broadly, as Treasury yields serve as

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    The document is a case study about Carson Company, which has substantial loans with interest rates tied to market rates. Carson is expecting growth and needs more financing. It closely monitors the Fed since it has large debt exposure. Carson's service alerted it that the Fed has been selling large holdings of Treasury securities. (a) The Fed selling Treasuries will place downward pressure on their prices and upward pressure on their yields, since increased supply leads to lower prices and higher yields. (b) The Fed selling will place upward pressure on Treasury yields, as greater supply of Treasuries will increase their yields. (c) The Fed selling will place upward pressure on interest rates more broadly, as Treasury yields serve as

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    14 views1 page

    Lahore School of Economics Intro To Capital Markets: Quiz 2

    Uploaded by

    Mishal Khalid
    The document is a case study about Carson Company, which has substantial loans with interest rates tied to market rates. Carson is expecting growth and needs more financing. It closely monitors the Fed since it has large debt exposure. Carson's service alerted it that the Fed has been selling large holdings of Treasury securities. (a) The Fed selling Treasuries will place downward pressure on their prices and upward pressure on their yields, since increased supply leads to lower prices and higher yields. (b) The Fed selling will place upward pressure on Treasury yields, as greater supply of Treasuries will increase their yields. (c) The Fed selling will place upward pressure on interest rates more broadly, as Treasury yields serve as

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    © All Rights Reserved
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    Lahore School of Economics

    Intro to Capital Markets


    Quiz 2

    Case study-Monitoring the Fed


    Carson Company has obtained substantial loans from finance companies and commercial
    banks. The interest rate on the loans is tied to market interest rates and is adjusted every six
    months. Expecting a strong U.S. economy, Carson plans to grow by expanding its business
    and by making acquisitions. The company expects that it will need substantial long-term
    financing and plans to borrow additional funds either through loans or by issuing bonds. The
    Carson Company is also considering the issuance of stock to raise funds in the next year.
    Given its large exposure to interest rates charged on its debt, Carsonclosely monitors Fed
    actions. It subscribes to a special service that attempts to monitor the Fed’s actions in the
    Treasury security markets. It recently received an alert from the service that suggested the
    Fed has been selling large holdings of its Treasury securities in the secondary Treasury
    securities market.

    Questions
    a. How should Carson interpret the actions by the Fed? That is, will these actions place
    upward or downward pressure on the price of Treasury securities? Explain.

    b. Will these actions place upward or downward pressure on Treasury yields? Explain.

    c. Will these actions place upward or downward pressure on interest rates? Explain.

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