Which of the following moves inversely to each other?
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A. B. C. D.B
The correct answer is A: Interest rate and debt to equity ratio move inversely to each other.
Explanation:
The debt to equity ratio measures the amount of debt a company has in relation to its equity, and it is calculated by dividing total debt by total equity. A high debt to equity ratio indicates that a company is financing its operations with more debt than equity, which could be a risky financial strategy. A low debt to equity ratio, on the other hand, indicates that a company is financing its operations with more equity than debt, which could be a more conservative financial strategy.
The interest rate, on the other hand, is the cost of borrowing money, and it is determined by the supply and demand for credit, as well as by the actions of central banks. When interest rates are low, borrowing money is cheaper, which makes it easier for companies to finance their operations with debt. On the other hand, when interest rates are high, borrowing money is more expensive, which makes it more difficult for companies to finance their operations with debt.
Therefore, the debt to equity ratio and the interest rate move inversely to each other. When interest rates are low, companies are more likely to finance their operations with debt, which leads to a higher debt to equity ratio. When interest rates are high, companies are less likely to finance their operations with debt, which leads to a lower debt to equity ratio.