Answer to Question #147034 in Finance for juwita

Question

As a manager of a firm, you are concerned about a potential change in interest rates, which would affect money market prices. An economic report has recently highlighted the following economic conditions: (i) Bank Negara Malaysia is expected to keep the Overnight Policy Rate (OPR) unchanged in 2021; (ii) Budget deficit is expected to decline slightly in 2021; and (iii) The yield curve in Malaysia currently exhibits a consistent downward slope. Assuming that money market prices are not exposed to credit risk, how will money market prices change based on the report? Explain.

Answer 1

The money market prices are expected to remain relatively constant if Bank Negara Malaysia is expected to keep the overnight. Overnight trading compensates for the reduced number of customers to trade during the day because of the effects of the pandemic. When the budget deficit is expected to decline slightly in 2021. The money market prices go down because the purchasing power and the ability of the people to trade will have been reduced. When the yield curve in Malaysia currently exhibits a consistent downward slope, it also translates to low earnings which will have a negative implication on the market prices.