# Suppose interest rates on residential mortgages of equal risk are 5.5% in California and 7.0% in New York. Could this differential persist? What forces might tend to equalize rates? Would differentials in borrowing costs for businesses of equal risk located in California and New York be more or less likely to exist than differentials in residential mortgage rates? Would differentials in the cost of money for New York and California firms be more likely to exist if the firms being compared were very large or if they were very small? What are the implications of all of this with respect to nationwide branching?

### Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

### Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

#### Solutions

Chapter
Section
Chapter 6, Problem 1Q
Textbook Problem

## Suppose interest rates on residential mortgages of equal risk are 5.5% in California and 7.0% in New York. Could this differential persist? What forces might tend to equalize rates? Would differentials in borrowing costs for businesses of equal risk located in California and New York be more or less likely to exist than differentials in residential mortgage rates? Would differentials in the cost of money for New York and California firms be more likely to exist if the firms being compared were very large or if they were very small? What are the implications of all of this with respect to nationwide branching?

Expert Solution
Summary Introduction

To identify: The comparison between the interest rates available at different places.

Introduction:

Interest Rate: A rate at which a borrower is ready to pay and depositor is ready to receive the money is known as interest rate.

## Answer to Problem 1Q

• Yes, the difference of the residential mortgage rates of two different cities can be persisted.
• There are certain forces like demand and supply that can lead to the rates to be equal.
• No, the cost of money borrows for the business purpose doesn’t lead to the same risk as the money should be borrowed from the place which charges the less interest.
• The large firms of the NY and C will prefer to take loan which has the less cost of money.
• To borrow the money the less interest rate is better and to invest the money high interest rate is better.

### Explanation of Solution

• The differences of the interest rates totally depend upon the demand or supply of the financial product that prevail in the market.
• The increase in supply leads to decrease in the interest rate of New York and rates would be equalized.
• The increase in demand leads to increase in the interest rate of New York and rates would be equalized.
• The businesses might take into consideration of the cheapest available mortgages.
• The center which provides the money at the lowest possible cost should be preferred by the large business firms and the interest rates will be equalized and small firms will be able to get the loan at the lowest cost.
Conclusion

Hence, to invest money the higher interest rate should be preferred and to borrow the money lower interest rate should be preferred and these interest rates has an effect from the demand and supply of product.

### Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Get Solutions

### Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Get Solutions

Find more solutions based on key concepts
Show solutions
Why is productivity important?

Principles of Microeconomics (MindTap Course List)

Why do U.S. corporations build manufacturing plants abroad when they can build them at home?

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Describe the transactions that are recorded in the following equation:

College Accounting (Book Only): A Career Approach