Canadian Securities Course (CSC) Level 1 Practice Exam

Which of the following is not considered one of the determinants of interest rates?

1. Demand and supply of money

2. Default risk

3. Central bank credibility

4. Foreign demand for bonds

The correct answer is: Demand and supply of money

The choice that identifies a factor not considered a direct determinant of interest rates is related to the various influences on how interest rates are established in financial markets. Interest rates are primarily affected by the interplay of various economic factors. The demand and supply of money is a fundamental determinant of interest rates. It reflects how much money is available for lending (supply) versus how many borrowers are seeking loans (demand). When there is a high demand for loans and a relatively stable supply, interest rates will generally rise. Conversely, if there is a surplus of money and less demand for loans, interest rates tend to fall. Default risk, which relates to the likelihood that borrowers will fail to repay their loans, significantly affects interest rates. Higher perceived default risk leads lenders to charge higher interest rates to compensate for the additional risk they are taking. Central bank credibility influences interest rates through monetary policy and the economic stability it promotes. If a central bank is viewed as credible, it helps stabilize inflation expectations, leading to lower interest rates. Foreign demand for bonds also plays a critical role in interest rate determination, particularly in an interconnected global economy. When foreign investors seek Canadian bonds, it can lead to increased bond prices and lower yields, thereby impacting interest rates. Thus, the statement