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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
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?

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
  • 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
  • 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.

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