Monetary policy :sample problem
For the past 3 years a major department store chain has averaged approximately $10 billion in long-term debt. Their debt is in the form of bonds that have been sold to investment funds and the public (If you are not sure what a corporate bond is look it up on the internet). For the sake of argument, let us assume that either now or one-year from now they wish to add an additional $5 billion to finance store expansion. This is a given, management has already made this expansion decision and it does not need to be commented on. The objective of management is to issue bonds at the lowest interest rate. Given this objective, should they issue the bonds now or wait for one year if they feel the Federal Reserve will follow:
a. an expansionary policy?
b. a contractionary policy?