1.Financial market and the types of transactions supported by it in the U.S. and global economies. Determine how valuable these transactions are to the overall U.S. and the global economies.
The capital market forms a place, where different institutions and individuals trade financial securities. Institutions and organizations in the private and public sectors often trade securities in the capital markets in an effort to raise funds. Therefore, this market is comprised of both the secondary and primary markets.
Any corporation or government requires capital to finance its processes and to involve its long-term enterprises. In order to achieve this, a company produces money through the sales of securities, bonds, and stocks in a company’s identity. These are sold and bought in capital markets (Beck et al., 2004).
Stock markets permit investors to sell and buy shares in the openly traded businesses. They form one of the most important areas of the market economy. This is because they offer companies the admission to investors and capital with a share of possession in the business. They also make it possible to use the gains founded on the business’s future concert. This arcade can be sub-divided in the two major sections. They are the secondary market and the primary market. The primary market forms the new issues that are accessed with any trading succeeding into the secondary markets (Beck et al., 2004).
The bond forms the debt investment, when a depositor loans money to the entity that is governmental or corporate unit, which borrows the money for a specified period at a static interest rate. They are utilized by the companies, states, the U.S. foreign governments and municipalities to back a diversity of activities and projects. Bonds may be purchased and sold by the investor on a credit market around the universe. This market is also referred to as a debt, fixed, or credit income market. It is quite larger in the nominal positions that the universal stock market. The main collections of bonds are the corporate bonds, the U.S. Treasury bonds, municipal bonds, and bills and notes that are collectively denoted to as treasuries (Levine, 2004).
2. Evaluate all the factors that affect interest rates to determine the one that appears to impact interest rates the most in today’s economic climate. Support your answer with evidence and examples.
The interest rate refers to the money borrowing cost. Alternatively, it is the recompilation for the risk and service of money lending. Without it, individuals could not be eager to offer or save their money. Both will require deferring the chance of spending in the present day. However, the prevailing interest rate is always altering, and different kinds of loans provide various interests rates. If a person is a lender, a borrower, or even both, it is important for one to understand the aims for these differences and changes (Levine, 2004).
Inflation rates influence interest rates. The moment the loan is required for a long time, the lender requires a protection of his/her benefits. Thus, the lender could try to recuperate all the cash lent by altering the inflationary premiums on the cash lent. Therefore, the rates of interests and inflation have direct relationships. When inflation increases, interest rates escalate as well.
General market situations have the capability to impact interest rates. The moment the trends in the prevailing market are better, heavy interchanging occurs. For trading depositors money are required; therefore, people pursue loans. Since they are aware that they will be capable of recovering their cash, they do not worry paying higher interest rates on the loans. The moment the market functions are lethargic, investors become cautious of trading deeply, and later the lenders will not be in place to alter high interest rates (Levine, 2004).
Borrower’s Financial Position
The financial conditions of the borrower have an interest rates bearing. A more fiscally stable borrower is capable of obtaining a lower interest rate loan. Borrowers offer very little probability of default that lenders are eager to receive; a lower reappearance in an altercation for less risk. The moment the lender evaluates that the situation of the debtor is not quite sound, the lender alters higher interests in line with risks intricated.
Length of the Loan
The terms and conditions of loans and the interest rate have a straight connection. There is an element of indecision comprised in the loans of elongated duration. Thus, lenders alter higher rates of interest for longer terms loans.
The Federal Reserve may impact interest rates by locating the rates of discount, the rates that banks emolument for the short-term loans from the Federal Reserves. It can as well impact interest rates by changing the supply of money.
3. Analyze the ease or difficulty of forecasting interest rate changes. Assess the value of the forecast provides.
Interest forecasting is closely associated with the business cycle forecasting, because history and theories of actions interact. They demonstrate that rates of interest variations are not synchronous with the enterprise cycle and main causes of alterations in borrowing, and lead to recessions and expansions. Archeologically, there are instances of elevated interest rates in the recession periods, like in the year 1980 and in the year1982. However, the components that were accountable for this, were inflations associated with oil catastrophes. One might indeed recall the stagflation days. This exemplifies that forecasting rates of interest requires the analysis of all of the six elements that are investment demand or non-use of money, inflation, time structure, liquidity preference, premium for risk, and monetary policy. One may ignore risk premium and time structure as being exact to a certain company and asset, although one is reminded that some plans producing curve fluctuations, rely specifically on these elements (Levine, 2004).
By all means, trading of models is not an easy task. In fact, they may be very difficult. They make the trader examine various economic reports very closely. Receiving figures is not sufficient when utilizing the models. One should get beyond figures, read the intelligences closely, and examine their connotation. It can be hard and time-consuming, though rewarding (Rose, Marquis, 1994).
To abridge the work further, an individual could be desirous to eradicate inflation, because financial choices ought to be made on the foundations of real market rates and not on the nominal rates. However, inflation enters the reckoning in two turns. First is losing the money purchasing power, and it is the reason for the tight money strategy. The tight money strategy will raise interest rates. Therefore, dealing with the inflation is inevitable. Inflation would initially be distracted, as an increase is outlined occasionally to the extreme demand. They comprise of the growing due disposable incomes that sometimes bottleneck the distribution or production of goods. Recently, inflation rate has been taken as completely monetary marvel of extra money creation. Because money-making process is what monetary strategy is envisioned to regulate, the presence of all inflations is a flexible choice for the authority purposes of the central bank. Forecasting central bank’s strategy is tricky, because of its political ramification. For the Western nations, the commercial bank’s reserves size can be revealing of the necessity for the actions of the central bank. Forecasting is hard, though it becomes easier in the preceding section of the last century, the moment inflation has been moderated.
4. Examine why the Federal Reserve was created. Then construct an argument as to whether or not the Federal Reserve’s major roles are essential to the U.S. economy.
By making the Federal Reserve Systems, Congress envisioned to remove the severe financial disasters that had occasionally swept the states, especially the collection of financial fight that happened in the year 1907. At that episode, expenses were distributed throughout the nations, since many clearinghouses and banks declined to clear payments drawn on other banks. This is an exercise that denoted to the failure of solvent banks. In order to address these predicaments, Congress offered the Federal Reserve Systems the permission to start a nationwide check-payment systems. The System was to offer a flexible currency that could shrink or expand in quantity, as an economic situation warranted. However, it is an equitable and efficient check gathering system.
The Federal Reserve plays an essential responsibility in the United States payments systems. The twelve Federal Reserves Banks offered to the bank facilities to store organizations and federal governments. For depository organizations, they uphold accounts and offer various payment services comprising gathering checks, electronically transporting funds, and allocating and getting currency. For the federal governments, the Reserves Banks perform as fiscal mediators, processing electronic payments, paying Treasury checks, and issuing, redeeming, and transferring the United States government safeties. Founded in Washington, D.C., they withhold the reserves of the United States government and control the nation’s financial organizations. It is comprised of the network of twelve Federal Reserves Banks and the number of outlets.
5. Choose a recent monetary policy (adopted during the past twelve (12) months). Analyze its current and future impacts on the U.S. and global economies.
RBI’s monetary strategy of September 2013. On the foundation of examinations of the prevailing and developing macroeconomic conditions, it has been absolute to:
- Lower the bordering standing ability (MSF) rates by 75 foundation points from 10.35 percent to 9.45 percent with an immediate effect;
- Lower the minimum daily upkeep of the money reserve ratio (CRR) ranging from 99 percent of requirements to 95 percent efficient from fortnights starting September 22, 2013, whilst maintaining the CRR unaffected at 4.0 per cent;
- Raise the strategy report rate under the fluidity adjustment ability (LAF) by 25 base points from 7.35 percent to 7.45 percent with an instant effect.
Therefore, reversing repo rates under the LAF opinions attuned to 6.5 percent is a good decision, as the Bank Rate stances lowered to 9.5 percent with the immediate impact.
6. Imagine one is a financial manager. Develop a strategy for the use of bond markets by either an investor or firm of your choice to meet a stated financial objective of your choice for that an investor or firm.
Alternative exchange systems that institutional and individual investors can utilize to make direct business without using brokers, NASDAQ, and securities exchanges comprise the markets. In the third markets, over-the-counter businesses comprise of those created in securities registered on the AMEX, the NYSE, or other prepared relations. Into the fourth markets, transactions comprise of those that avoid the market creator and are made straight between sellers of securities and the large institutional buyers (Rose, Marquis, 1994).
- Beck, T., Demirguc-Kunt, A., Levine, R. (2004). Finance, Poverty & Inequality: Cross-Country Evidence. NBER Working Paper No. 10979.
- Levine, R. (2004). Finance and Growth: Theory and Evidence. NBER functioning Paper No. 10766.
- Rose, P. S., Marquis, M. H. (1994). Money and Capital Markets. Irwin, IL:Burr Ridge.