Question One Suggested Solution I) Rate of Interest

QUESTION ONE
SUGGESTED SOLUTION
i) Rate of interest:
The risk level of a bond mostly referred to as default rest, is one of the most essential
components that determine a bond’s interest rate. Ashanti Goldfields Company will
serve investors information about their bond's risk level by indicating that the
company will default on its bond obligation. Usually, the higher the default risk, the
higher the interest rate of return on the bond to compensate for more risk accrued by
the investors.
Again, during times of pandemic and economic stress such as the Covid-19 era,
the spread between corporate bond, in this scenario Ashanti Goldfields bonds yields
and Government of Ghana bonds yields typically rises to attract more investors.
Economic downturns usually contribute to higher rates of business failures and
defaults, thus leading to bond buyers demanding higher interest rates to compensate
for the risk they are taking when investing in a corporate bond.
ii) Credit risk (Spread):

Credit risk is the risk that an investor may not get his/her money paid back. Corporate
bonds usually have a lower credit rating as compared to government bonds. the lower
quality of bonds offers higher yields than the higher-quality bonds, this is because
investors demand more compensations for engaging in higher risks that they are
unlikely to recoup their investment back when compared to government bonds.
iii) Tax Policies:

Ashanti Goldfield's bonds may be oversubscribed at the expense of Government of
bonds because interest payments (coupons) are exempt from income taxes. Therefore,
investors are willing to take a lower rate due to tax savings.
QUESTION TWO
a). The monetary policy tool used was the discount rate.
Discount Rate:
The discount rate refers to the interest charged to the selected financial institutions for
onward lending to businesses. This monetary policy initiated by the government is an
expansionary monetary policy tool and it is used to stimulate growth. this lowers the discount
rate, here in this case at null (0% per cent), which means the financial institutions have to lower
their interest rates to become competitive. The discount rate offered by central banks usually
come at a relatively higher interest as compared to the interbank borrowing rates to discourage
commercial banks from consistently visiting the central bank and discount loans are intended to
be available for banks in distress. However, in this initiative, it increases the money supply in the
system, enhance lending and boost economic growth.
Small Medium Enterprises and other business setups which have adversely been affected by
the Covid-19 pandemic, can have access to these soft loans at a lower, in this scenario at three
(3%) per cent to inject it into areas which have been badly affected by the pandemic.
b). Advantages of Pegging the Interest rate at the Monetary Policy Rates
The discount is the interest rate set by central banks on loans extended to the commercial banks
or other financial institutions. If the government had pegged the interest rate under the program
at the monetary policy rate which currently stands at 14.5%. The government invariably is
conducting a contractionary monetary policy. This is used as a measure to reduce liquidity
problems and the pressures of the reserve requirements. Pegging the interest at this rate will
control the supply of money and it used to assure the stability for dealers in the financial markets.
Disadvantages of Pegging the Interest rate at the Monetary Policy Rates

Setting a high discount rate, in this case from 0% to 14.5% tends to have the effect of raising
other interest rates in the economy since it represents the cost of borrowing money for most
commercial banks and other financial institutions. This could be considered a contractionary
monetary policy.
Interest rates represent the cost of borrowing money. When it becomes less costly for banks to
borrow money from the Central Bank, they can ultimately charge less interest on their loans.
This has a ripple effect on the demand for loanable funds across the sector unless the market rate
of interest is equally as high. At such a higher rate, the banks will also loan these funds to Small
Medium Enterprises and other business setups at a higher rate. Businesses which are not in a
capacity to finance these loans will the loans, the business shrinks which will inherently affect
economic growth.
c). Expected impact of the low-interest rate program on the gross domestic product (GDP)
 Lower interest rates help the economy by increasing the rate of investment. This is
because the costs of financing investment, either by debt or equity, is lower when the
interest rates drop. Since the costs of investing are less, corporations and individuals will
invest more. To understand the effects of an interest rate decline on investment, it's
helpful to divide investment into three types: residential construction, producers' durables
and non-residential construction. For example, a 2% per cent fall in nominal mortgage
rates leads to a relatively large increase in residential housing investment in Ghana.
 Interest rates also affect bond prices. There is an inverse relationship between bond prices
and interest rates, meaning that as interest rates rise, bond prices fall, and as interest rates
fall, bond prices rise. The longer the maturity of the bond, the more it will fluctuate
concerning interest rates.
 To help keep inflation manageable, the Central bank watches inflation indicators such as
the Consumer Price Index (CPI) and the Producer Price Index (PPI). When these
indicators start to rise in the year, the Central bank will raise the fund's rate to keep the
rising prices under control. Because higher interest rates mean higher borrowing costs,
people will eventually start spending less. The demand for goods and services will then
drop, which will cause inflation to fall.
QUESTION THREE
Reasons why governments bail out banks during an economic crisis
i) The government bailout of defunct banks helps the rest of the economy.
Financial institutions provide the loans that businesses need to open up, innovate, and
invest. Without those loans, the speed of growth in the economy slows substantially, and
may even go into reverse. Moreover, economic growth requires businesses and
individuals to be confident enough in the economy to make investments. When the
government shows that it is willing to support the economy, investors will have more
confidence and economic growth increases.
ii) The government of Ghana holds significant responsibility for the credit crisis.
The government has responsibility for the crisis, the government should pay to support
the companies affected by it. A typical exam was the financial crisis in Ghana from 2017
onwards, which led to the collapse of several local banks in the country due to certain
regulatory lapses in the system. This brought several financial reforms in the financial
sector.
iii) Banks collapsing also hurts individual citizens.

Many pension plans and retirement savings have money invested in financial stocks.
Bankruptcy destroys those investments, meaning less money for pensioners and retirees.
In such circumstances, the government should step in to ensure the survival of major
financial institutions. A recent example is a Menzgold saga, God is Love and DKM saga,
which led investors of these financial institutions to a lot of distress, some lost their lives
as a result of this trauma.
iv) The global economy is at risk of a much more severe collapse without an injection of
government money. Without government bailouts, the bankruptcy of these institutions is
likely, and that has the direct effect of putting at risk those assets that the bank manages.
Mortgages, investments and savings which are insured and managed by banks are at risk
of losing a substantial portion of their value, which would destroy significant amounts of
economic growth.
v) Governments are not just giving financial institutions financial assistance. Rather, they
are generally exchanging the money for shares in the company. This has two positive
effects. Firstly, the government as a shareholder and partial-owner can direct the
company to act in the interests of the nation and to avoid overly risky investments.
Secondly, in future, the government can sell those shares and recover some of the costs of
the bailout.
b). The condition under which the world can be classified as being in a recession as
COVID-19 persists
A recession is a period of declining economic performance across an entire economy that lasts
for several months. It is a business cycle contraction when there is a general decline in economic
activity. Recessions generally occur when there is a widespread drop in spending. This may be
triggered by various events, such as a financial crisis, and pandemics such as the Covid-19.
STAGES OF A RECESSION concerning THE COVID-19 PANDEMIC
STAGE ONE: INITIAL PHASE
INCREASE IN UNCERTAINTY
The COVID-19 pandemic has triggered a massive spike in uncertainty. Major uncertainties
surround almost every aspect: the infectiousness, prevalence, and lethality of the virus. Since a
lot of people are not engaged in any serious economic activity, there will be an upsurge of panic
withdrawal amidst these uncertainties. The stock market becomes volatile which raises high
uncertainties in the minds of investors. the first major sign of the coronavirus recession was the
2020 stock market crash on 20th February.
STAGE TWO:
BANKING CRISIS
When the virus spreads, so does hardship. Financial intuitions across the globe engage in some
form of business transactions to keep the institution afloat. For instances, banks issue loans to
business to earn interests of such transactions, they perform financial transactions for their clients
at a fee. Remittances sent through banks earn some form of changes. The outbreak of Covid-19
ceased most activities of their clients which invariable affects the bank's revenue and also goes a
long way to affect the economic activities of the country negatively.
STAGE THREE:
DEBT DEFLATION (UNANTICIPATED DECLINE IN PRICE LEVELS)
The reduction in the demand for travel and the lack of factory activities especially in China due
to the COVID-19 pandemic significantly impacted demand for oil, causing its price to fall. The
enactment of lockdown orders across the globe hindered movement. Major airline companies
such as American Airline, Boeing hard a severe hit in their sales. Prices of some assets became
worthless during the crisis.

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QUESTION ONE

ii) Credit risk (Spread):

iii) Tax Policies:

Disadvantages of Pegging the Interest rate at the Monetary Policy Rates

iii) Banks collapsing also hurts individual citizens.

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