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Financial Markets and Risk - Essay Example

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Financial Markets and Risk

These operate in a competitive financial market where the objectives of firms are met. The objectives of the firm include: profit maximization, wealth maximization, employee welfare, customer interest, society welfare, and duty to the government. The current rate of economic development, characterized by fluctuations in price, increased poverty levels. Increase in population growth rate, among other factors, has led to a crisis in the financial institution. These have also impacted on the performance of the financial market sector, savings and investment sector, as well as the general performance of the economy. This report brings out clearly the main long-term saving and investment products provided by the financial institutions, as well as the effects of increases in the rates of interest to the people and the commercial banks. Main long-term investment products for consumer provided by financial institutions The major sources of long term finance in the capital markets are actually the products provided to the consumer for long term investment. The consumers are assumed to be rational in their choices among the various alternatives presented. The choice of the product to use will depend on: time element, cost of finance, flexibility and the mode of payment. Long-term investment products provide funds that may be used usually for more than five years (Bollerslev and Mikkelsen, 1999, p. 75). They include: Share capital - this consists of both ordinary share capital which is contributed by the real owners of a limited company and it is not redeemable and the preference share capital. This is contributed by the preference shareholders. Retained earnings provisions - these are part of the profits which belong to the ordinary shareholders and are not paid to them in the period they are earned. Debentures or long-term loans - a debenture is the written acknowledgement of a debt incurred by a limited company. Mortgages - the consumers and companies can get loans for long periods by mortgaging their assets with any mortgage brokers or any other financial institution. Sale and lease back - a company which owns its own premises or fixed assets can obtain finance by selling the property to an insurance company for immediate cash and renting it back. The cost of finance or the product depends on the terms of finance, nature and size of the business, availability of the product, the nature of security, growth stage of the company and government influences through the central bank (Bollerslev and Mikkelsen, 1999, p. 80). Implications of increases in the levels of interest rates to savings by consumers and investors The central bank in any state through the action by the state is responsible for regulation of the interest rates (Benito, Waldron and Zampolli, 2007, p. 48). This means that, if the central bank’s rate of charge to the commercial banks increases, there is a corresponding increase in the rates of interest charged to the consumers and vice versa. The central banks are also responsible for the licensing and the supervision of the commercial banks on depositors interests rates. This is part of the monetary policies undertaken by the government to curb inflation. An increase in the general level of interest rates has several implications to the consumer including: Low savings and investments - the consumers’ rate of saving is affected due to the high rates of interest. The rates of returns to the customers are low ...Show more

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Topic:  Financial Markets and Risk Name: XXXXXXXXXXX Professor: XXXXXXXXX Institution: XXXXXXXX Course: XXXXXXXXXX Date: XXXXXXXXXXX Introduction The current state of economy is greatly influenced by business performance. Financial institutions facilitate financial transactions and events in any economy…
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Financial Markets and Risk essay example
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