Role of the Interest Rate in the Financial Markets - Assignment Example

Interest Rate plays a significant role in the financial markets, as it is a key determinant of investing activities and household spending in an economy. The business cycle and capital structure prevailing in an economy are influenced by macroeconomic policies. However, the significance of interest rate remains to be a debatable concern as it directly impacts long-term rate and practical economic implications to determine the behavior of an economy. The importance of short-run interest rate is the main determinant of saving and investment behavior of households and enterprises that denotes economic growth. Therefore, to understand economic development in an economy it is essential to determine interest rate level. The researchers have been constantly engaged to determine economic development by measuring interest rate, as the fluctuation in the investment activities cannot be determined by the investment period. Hence, the interest rate provides detailed information about the economic conditions of the economy by assessing investment conditions, financing terms, and capital markets. It can be determined by analyzing past trends of interest rates that are controlled and regulated by central banks. However, there are several macroeconomic factors that have affected the behavior of the short-term interest rate of an organization since 2005-2015. The constant fluctuation in the interest rate is persistently affected by economic events.

The section of the report illustrates the theoretical underpinning and conceptual framework of the study. Keeping in mind, the research objective past studies have been reviewed related to a similar topic. There is a number of theoretical frameworks and propositions laid down by researchers in the past. In order to present a wider perspective of theoretical propositions, the literature review in this study considers a wide range of theories relating to the topic.