Question

market rate of interest tends to be positively related to the bank rate​

Answer 1

Concept

The interest rate at which a country's central bank lends money to domestic banks, usually in the form of relatively short-term loans, is known as the bank rate. Central banks influence economic activity by manipulating the bank rate.

Given

Market rate interest and bank rate

Find

We are asked to explain are market rate of interest tends to be positively related to the bank rate​.

Solution

When the RBI raises the Bank Rate, banks' borrowing rates rise, reducing the amount of money available in the market. If you had a $1,000 10-year bond with a 10% coupon rate, the purchaser would get $100 in interest each year. The market interest rate on a bond, on the other hand, is a variable figure that reflects market sentiment.

Hence market rate of interest not positively related to bank rate.