StudentShare solutions
Triangle menu

Money,Banking&Finance - Essay Example

Not dowloaded yet

Extract of sample
Money,Banking&Finance

The present prices of the bonds would help in the determination of the market rate of interest, or the price that would be paid for the use of the money for a period of time. There exists a functional relationship between the rate of interest and the time of the bonds. The term structure of interest rates or the yield curve shows the relationship between the rate of interest and the yields of the bonds with the terms to maturities. The curve is a representation of the various opportunities that may exist for the arbitrage as well as the expectation of the markets about the interest rates that may prevail in future. Interest Rates While carrying out the analysis of the yield curve it is essential to know the components of the nominal interest rates. This equation shows that the real rate of interest represented by r is the main component of the rate of interest. On the other hand, sigma is the risk premium that is being added to the rate of interest which is open to fluctuations due to various events. On the other hand, ? is the representative of the rate of inflation while l is the component that would capture the liquidity. The various financial markets would offer bonds and other long term instruments that would be offering a variety of interest or the rates of return (Kettell, 2001, pp. 19-26). The premium is the representation of the consumer behaviour that would depict that the consumers would be unwilling to hold that particular asset class. The following diagram shows the break-up of the various components of the rates of interest. The loans that are provided for the long term cost higher because the premium for liquidity would increase with the increase in the tenure of the bonds. The people would always want to hold liquidity at the present period of time rather than a later period. The opportunity cost of keeping the money in the hand would be less in the present period as compared to the future period. Yield Curve The yield curve is drawn from the yield to maturity of the bonds. The yield to maturity (YTM) is considered to be the approximate value of the rate of interest for a particular term to maturity of a bond. The various points of the terms to maturity and the corresponding yields to maturity are plotted on a plane and the curve that is fitted along these points is known as the yield curve. The following diagram is an example of a yield curve. In the plane the vertical axis measures the yield of the bonds and the horizontal axis measures the term to maturity of the bond. Figure 1: Yield curve The yield curve thus summarises yield of the different bonds that are being traded on a particular date. The yields or the different tenors in such cases may be different. The yield of a bond is the unique rate at which the cash flows that is provided by a bond is discounted. Thus even though the accrual of the cash flows are taking place at the different points in time the rate at which it is taking place is the same (Rossi, 2007, pp. 225-241). This rate is known as the yield to maturity of the bonds. In most cases the interest rates are considered to be fixed for the entire tenor. This would give rise to a flat yield curve as shown in the diagram below. Throughout the tenure of the bond the rate of interest that has been offered in case of this yield curve is 3.5%. Figure 2: Flat Yield Curve The ...Show more

Summary

Money, Banking & Finance Contents Contents 2 Introduction 3 Interest Rates 3 Yield Curve 4 Risk and Its effects 6 Pure Expectation Hypothesis 7 Liquidity preference theory 8 Preferred Habitat Hypothesis 8 Conclusion 9 References 10 Introduction Rates of interest are considered to be the price that is paid for a period of time for the usage of a sum of money…
Author : jakubowskileon
Money,Banking&Finance essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Money,Banking&Finance"
with a personal 20% discount.
Grab the best paper

Related Essays

Money & Banking Foreign Trade
Similarly, modern people largely depend on banking services including but not limited to check settlement, money transfer, online purchases, and payment of bills and subscriptions. With the emergence of globalization, countries worldwide liberalized their cross border trade laws which in turn promoted the concept of foreign trade.
17 pages (4250 words) Essay
Money & Banking
The study also mentions the recent shut down and take-over of Lehman Brothers and also the problems faced by AIG to borrow money. One of the most important responsibilities for the Fed is that of ensuring monetary stability in the economy, which can be achieved through a combination of stable prices of goods and services across the economy coupled with a low inflation level and level of confidence of the investors in the currency of the country.
9 pages (2250 words) Essay
Islamic Banking and Finance
Through the Islamic financial system there is a facilitation of services such as lending, borrowing and investing on a risk-sharing basis. The Islamic financial system can be called a value-based mechanism and the main target is to ensure “moral and material wellbeing” of the persons as well as the whole community.
12 pages (3000 words) Essay
Money and Banking
The Act necessitate the proper centralized financial supervisory group to persuade synchronized financial organization to meet up the credit wants
3 pages (750 words) Essay
Banking finance
ttp://books.google.com/books?id=plbBqZ9WIbUC&pg=PA67&dq=banking+and+emerging+markets+and+financial+crisis&hl=en&ei=EOiRTO-CMI_eOMHfuYsH&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDUQ6AEwAQ#v=onepage&q=banking%20and%20emerging%20markets%20and%20financial%20crisis&f=false http:/
10 pages (2500 words) Essay
Money, Banking & Finance Essay
In other words, the instinct of the Fisher theory of interest rates will be proved. This will be done by researching various evidences both on theoretical aspect as well as practical aspects. Fisher has his own way of
8 pages (2000 words) Essay
Islamic Banking and finance
A lot of arguments have cropped up in response to drawbacks associated with the profit and loss sharing (PLS) structure. These include issues like, risks associated with instruments of the PLS
18 pages (4500 words) Essay
MONEY AND BANKING ASSIGNMENT
techniques differ in countries and the strategy to compel market towards a rate target is through lending or borrowing money in quantities that is somehow unlimited. This is usually done up to the level where the set target for the target market is accomplished. They accomplish
8 pages (2000 words) Essay
Money and Banking Assignment
Although the central bank’s role in controlling inflation and ensuring that the economy runs smoothly is commendable, the problem occurs when it operates as the lender of last resort. Financial institutions ‘ability to easily access
4 pages (1000 words) Essay
Issues in Money, Banking & Finance
veloped economies as part of normal re-establishment of equilibrium, Japan has found it hard to recover from such a decline for many reasons, including bad debt burdens and the daunting task of restructuring its economy. This inability to reverse the decline in price levels, in
8 pages (2000 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation