StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Financial Market and Institutions ( ) - Assignment Example

Cite this document
Summary
When an economy expands with the growing wealth, demand for bonds raises, conversely, the demand for bonds falls when the economy and income falls. Expected returns: changes in expected return impact on…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.9% of users find it useful

Extract of sample "Financial Market and Institutions ( )"

Financial Market and The questions below related to Chapter 4: why do interest rates change? From the book “financial market and institution,7eMishkin”.Q1.Wealth: as wealth increase, demand for assets is more likely to increase. When an economy expands with the growing wealth, demand for bonds raises, conversely, the demand for bonds falls when the economy and income falls. Expected returns: changes in expected return impact on the demand of the asset. Higher or increased expected interest rates in the future economy decreases the demand for long-term bonds; on the other hand, lower or reduced expected interest rates in the future increases demand for long-term bonds.

Risk: an increase in risk causes the demand for bonds to fall; alternatively, reduced risk of assets causes the demand for bonds to rise. Liquidity: Fast and flexible liquidity of the asset market enhances demand for the assets. Conversely, increased liquidity of the alternative asset markets (like the stock market) lowers the demand for bonds. Wealth is the factor that impact on the total asset demand and that influence investors to demand one asset over another. Q2. Equilibrium interest rate is determined when the money supply and the interest are balanced.

The interest rate moves towards equilibrium when the temporarily above or below the below or above the rate of equilibrium because of excess or extreme supply, which in turn rises the interest rate. Q3.The transparent analysis of the Fisher effects is that if the expected inflation rises by 5% and above, the expected return on interest rate falls as a result of fall in the demand for the bond. Fisher effects occur because when expected inflation increases or rises, the nominal interest rates rise in return (Mishkin and Eakins 140).

The rise in expected inflation is a transparent proves that the real cost of borrowing or lending has declined, causing increase in the quantity of bonds supplied. Equilibrium bonds with fall in demand and increase in supply. Q4. If bonds turn out to be riskier than other assets, investors tend to switch and invest in less risky assets. Increase in relative risk of bonds decreases bond demand. Q5. The decreased riskiness of bonds increases the demand for bonds. The demand curve shifts to the right and the equilibrium bond price rises and the interest rate falls.

Higher federal government deficits increase the supply of bondsQ6.Re=P1R1+p2R2+……….+ PnRn Re=0.66*9%+0.33*3%=7%Standard deviation is asset’s risk and is equivalent to 2.282%.Bonds with lower standard deviation of return are preferred while all other are equal. The others are have a standard deviation of 4.5% which is has the same expected returns. Q7.Expected Profitability of Investment Opportunities; in a business cycle expansion, the supply bond falls when there are fewer expected profitable investment opportunities.

Expected Inflation; supply of bond increase when there is an increase in expected inflation. Government Activities; higher federal government deficits increase the supply of bonds, conversely, government surpluses reduces the supply of bonds.These questions related to Chapter 5: How do risk and term structure affect on interest rate.From the book “financial market and institution,7eMishkin”.Q1. Liquidity premium theory elaborates all the facts of the term structure that entails states interest rates for various maturities move together, yield curves have downward slope in conditions that short rates are high and steep upwards slope when short rates are low and yield curve is typically upward sloping.

Market segmentation theory elaborates one factor of the term structure. It elaborates that a yield curve is typically upward sloping.Q2. Borrowing cost for local government and municipalities culminates increased I income tax because of the huge tax differentials. Increased demand for borrowing funds causes the government to postpone buying decisions, raise tax, or highly rely on bond issues.Q3.The yield curve is an essential tool equipped with information about future interest rates that assists in real output production and forecast inflation. Q4.This is because expectation theory is transparently explains that bonds of various maturities are perfect substitutes.

It is proved in the statement that Re on bonds of various maturities are equal. Q5. Risk structure of interest rate is the relationship focused on bond interest rate of same dept instruments such as maturity, payment structure, and issuer. Q6. Severe recession will always raise the premium risk. This in turn shifts the demand curve towards the left.Q7. This is because, if a corporate begins to suffer huge losses, the default risk on the corporate bond increases. The bonds return will turn out to be uncertain, meaning, which will in turn cause the expected return on the corporate bond to fall. Q8. Credit-rating are obligated to assign credit ratings.

The ratings rate a debtors ability to make timely debt payment and the likelihood that default will culminate. The agencies are essential in assessing the risk of investing in the government and other firms.Q9.Liquidity is quick and cheaper. It can be converted into cash in case any need culminates. This makes it to be widely accepted. Works CitedMishkin, Fredric, and Eakins Starnley. Financial Markets and Institutions. New Jersey: Pearson Education. 2014, Print.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Financial Market and Institutions (Assignment ) Assignment”, n.d.)
Retrieved from https://studentshare.org/finance-accounting/1669020-financial-market-and-institutions-assignment
(Financial Market and Institutions (Assignment ) Assignment)
https://studentshare.org/finance-accounting/1669020-financial-market-and-institutions-assignment.
“Financial Market and Institutions (Assignment ) Assignment”, n.d. https://studentshare.org/finance-accounting/1669020-financial-market-and-institutions-assignment.
  • Cited: 1 times

CHECK THESE SAMPLES OF Financial Market and Institutions (Assignment )

The Economics of Regulation

This paper 'The Economics of Regulation' presents the equilibrium market price which depicts the average price in the market where the purchase of goods in the market is favorable to both consumers and suppliers.... A market with an equilibrium price as the market value has the advantage of the goods.... Question 5 Answer Price ceiling refers to the largest export cost the government imposes to prevent supplies and producers from overcharging their products in the market....
3 Pages (750 words) Assignment

Accounts in the Balance Sheet and Income Statement of the Bank of Abu Dhabi

It is the market leader amongst lending banks in the Emirate of Abu Dhabi and the second largest player in the United Arab Emirate lending market.... hese are identified as financial assets which are held for the purpose of trading them in the market.... he National Bank of Abu Dhabi is a premier bank offering the complete range of financial services in 18 countries.... I will now be defining the assets that are in the financial statements of the National Bank of Abu Dhabi....
6 Pages (1500 words) Assignment

Origin and Business of CBI and QNB

Moreover, the assignment also focuses on the mission and vision of the organizations of CBI and QNB… However, in order to improve the demand of their banking product and services, increase sales and market share, the types of strategies used by the CBI and QNB will also be analyzed in an effective way.... This helped the organization to improve its market share and demand in the market of United Arab Emirates as compared to many other rival contenders....
6 Pages (1500 words) Assignment

Future Economic Prospects of the Philippines

Recently, a campaign to clean the government seem to be fruitful as the country are showing gains in economics despite the recent financial recession.... The country is a point of interest because it has been showing positive economic developments that was not present in the past....
2 Pages (500 words) Assignment

Capital Markets in India

It has two mutually supporting and indivisible segments: the primary market and the secondary market.... The secondary market may also include the over the counter market and the derivatives market.... hellip; The author states that in the primary market, companies issue new securities to raise funds.... Hence it is also referred to as the new issue market.... The secondary market deals with the second-hand securities, these are securities that have already been issued by companies that are listed in a stock exchange....
7 Pages (1750 words) Assignment

The Functions of International Financial Capital Markets

It has two mutually supporting and indivisible segments: the primary market and the secondary market.... he secondary market may also include the over the counter market and the derivatives market.... Availability of loan capital on easy terms from the term lending institutions.... hellip; In the primary market, companies issue new securities to raise funds.... Hence it is also referred to as the new issue market....
7 Pages (1750 words) Assignment

Political Dimension Concepts

In an accumulation regime, there are various institutions and policies that support mass consumption.... flexible labor market refers to a situation where firms operate under fewer regulations and are in a position to set wages or downsize their workforce at will.... On the contrary, a labor market with low flexibility has more regulations to control the operations of firms.... While opponent's labor market flexibility reiterates that power in the hands of employers results in an insecure workforce, proponents consider a flexible labor market as critical in minimizing the unemployment rate and improving the GDP growth....
7 Pages (1750 words) Assignment

Markets at the Mercy of States in International Relations

iscussionOverviewMany multinational corporations opt to invest in markets where political and legal institutions are anchored in the rule of law.... Over the last few decades, free trade has been advocated as the most important factor that facilitates democracy, peace, and prosperity in the increasingly globalizing market.... Over the last few decades, free trade has been advocated as the most important factor that facilitates democracy, peace, and prosperity in the increasingly globalizing market....
6 Pages (1500 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us