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FINANCIAL MARKETS AND MONETARY POLICY - Essay Example

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FINANCIAL MARKETS AND MONETARY POLICY

Other research has offered a concrete evidence favoring instability in the yield curve of the United States. The evidence is referenced with a rising theory on the side of macroeconomic where the inflation dynamic and real activity was characterized by significant period variation in various industrialized economies. The function of this paper double folds. First, the paper assesses the extent of period variation in the changes of some yield curve and macroeconomic variables. Secondly, the paper investigates if the term structure analysis can shed new dimensions of the performance of UK macroeconomic of the last five years. It is emphasized that various present studies have analyzed the UK macro economy dynamics and its term structure in situ. There is also a systematic investigation on the evolution of the connection between the yield curve and the economy over time. The paper specifies the relationship between finance and macro like in Nelson-Siegel model UK yield curve from 2008-2012 Financial Instrument for the Yield Curves Gilt-edged securities Normal gilt is a sure way by the nation to make payments of the guilt. A fixed cash payment is made semi-annually until a maturity date is attained. At maturity, the holder receives the terminal coupon and the principal. The index-linked gilt is generated to protect the investment value (Mishkin, 2012). General Collateral sale and repurchase agreement The transactions of selling and repurchasing involve the temporal exchange of gilt and cash between partners; gilts are used as collaterals. The fund ‘slender will hold gilt as collateral, so is safeguarded when the borrower defaults. The repo of the General Collateral is the rated for repurchasing agreement where gilt may be utilized as collateral. Therefore, the General collateral was closer to the risk-free rates. The contracts of Repo are traded actively for maturities annually. The rates prevailing on the Repo contracts are equal to the yields of the conventional gilts maturity (Ritter , Silber, Udell ", 2009). Interbank loans An interbank loan is a loan where the lender receives a certain agreed sum at call. The loan was not tradable. The offer rate was the interest rate the bank was willing to lend cash to financial institutions. The offer rate was calculated by mean of the medium offer rates that was collected at 11 am from 16 financial institutions. Short sterling future A short sterling contract was the future contract of sterling interest rate that settled on the LIBOR rate that prevailed on the delivery date of the contract. The contracts were traded and standardized between the Options Exchange and London International Financial Future members. Forward rate agreement This is the Over the Counter contract where the counter parties decide to exchange the difference in the LIBOR rate and agreed interest rate. We calculated the payment against the principal. The instrument allowed organizations to be held in future lending rates and interbank borrowing. Unlike the future contracts, the instrument was a bilateral agreement having no secondary market (Madura ", 2008). Swaps This is where the two counterparts decide to exchange the payments of interest rates for payments of floating interest rates, based on the notional principal at the beginning of successive periods. The instrument was equal to a ...Show more

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FINANCIAL mARKETS AND mONETARY THEORY (Author’s name) (Institutional Affiliation) Key words: Monetary Policy, Financial Market Term Structure of Interest Rates The interest rates’ term structure and economy are closely related. Conversely, the anticipations of real activity and future inflation can be crucial in determining the yield curve…
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FINANCIAL MARKETS AND MONETARY POLICY essay example
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