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.

Question

Quizplus · Accepted Answer

Financial institutions typically hold bonds in their portfolio with fixed interest rates. If the Fed increases interest rates, the value of their existing bond holdings decreases. This is because new bonds with higher interest rates become available, reducing the demand for existing bonds with lower interest rates, leading to a decrease in bond prices. Therefore, their portfolio is unfavorably affected when the Fed increases interest rates.

Financial Institutions Such as Commercial Banks, Bond Mutual Funds, Insurance