This can be attributed to the increased cost of debt funding for the major banks in Australia. Study of major banks’ fund composition shows that the banks are shifting their focus towards deposits and long term borrowings more and there has been a decline in share of short term debt in banks funding. Amongst others, higher deposit rates have contributed significantly towards increase in debt funding costs for banks. Although the share of equity has also increased in the banks’ funding composition but it has not contributed much towards changes in housing loan rates, since they are less risky. Until recently, in 2011, the spread between standard housing loan rate and cash rate has reduced by about 10 basis points due to the increase in discounts offered by the banks on new mortgages, but it’s only a small reduction compared to the overall spread. Table of Contents Table of Contents 3 Widening of the spread between the major-banks standard variable housing loan rate and the RBA’s cash rate since 2007 4 RBA’s Cash Rate 4 Variable Housing Loan Rate and Cash Rate 4 Composition of Banks’ Funding 5 Cost of Debt and Equity Funding 5 Pricing for Risk and Banks’ Housing Loan Rates 6 Conclusion 6 List of Graphs 7 References 10 Bibliography 12 Widening of the spread between the major-banks standard variable housing loan rate and the RBA’s cash rate since 2007 RBA’s Cash Rate The key objective of RBA’s monetary policy is to lower the inflation rate, targeting around 2 to 3%. Other objectives of RBA’s monetary policy include low unemployment rate and maintaining a stable growth of Australian economy. Cash rate is the primary tool which is used by RBA to regulate the monetary policy in the country. It increases target cash rate when the inflation pressure is in excess of the RBA’s target and it decreases the target cash rate when the economy can grow at a faster rate without creating any inflation problem (Lowe, 1995, p. 3-15). If we look at the history of RBA’s cash rate, it can be inferred that there has been a steady increase in cash rate from 2007 till mid 2008, which was the beginning of Global Financial Crisis (GFC). Then there was a sharp decline in cash rate during the period of mid 2008 till April, 2009. The cash rate was as low as 3% and continued to be so till September, 2009. Since October, 2009, there had been a steady increase in cash rate (Graph 1). Until recently there had been minor cuts in cash rate and is at 4.25%, as of today (RBA, n.d.). Variable Housing Loan Rate and Cash Rate The trend of standard variable housing loan rates is believed to follow the trend of cash rate. It is so because the household cost of funds are driven by the cash rate. If we compare the standard variable housing loan rate with cash rate, we find an overall strong correlation between these two rates over the years but with some anomalies in between (Graph 2). If we watch closely, it can be found that there has been an increasing spread between the major bank’s standard variable housing loan rate and the cash rate since 2007. This increase in variable housing loan rate by major banks relative to the cash rate can be attributed to the increase in bank’s cost of debt funding. In addition to this, higher equity funding costs and increase in expected losses have also attributed to this widening of spread between the two rates. Until recently, in 2011, the spread has reduced by about 10
FINANCE Executive Summary RBA uses Cash Rate as a tool for executing the monetary policy in Australia to control inflation pressure in the country. Overall, cash rate shows a positive increasing trend in the country, with the exception during the years of Global Financial Crisis…
This research will begin with the explanation of leverage buyout. An organization is often taken over by a particular firm involved in investment activities. These firms use a comparatively tiny portion of equity and a comparatively large portion of outside debt financing. This type of activity is known as leverage buyout.
This was the case prior to Global Financial Crisis (GFC). Since 2007, there has been a significant rise in the spread between major banks’ housing loan rates and RBA’s cash rate. This has been attributed to the rise in funding costs for banks. Due to GFC, all major banks have inclined towards using long term debt and deposits as their main source of funding because they are considered to be more safe and stable funding source for banks.
These changes frequently affect securities unequally and can be minimized through diversification or hedging. Diversification can be done by venturing into fixed income securities with different periods while hedging is done through the swap of interest rate.
Usually the business plan serves as a “sales” document, in that it is selling the business to a prospective investor or to a finance provider such as a bank as a good investment/risk. The basic requirements for this function are the same, although the former will focus on a rate of return for the investor, while the latter will focus on the affordability of the loan required.
9 Reason behind Choosing Venture Capital 9 Attractiveness of this venture 10 References 13 Bibliography 14 Appendices 15 Part1. Description about the Business The business is about opening a fitness center in Manchester. The fitness center will be situated at the north of University of Manchester.
Private Equity Funds.
Private Equity is the source of capital that is raised outside the public equity market in order to make investment in any asset or organization (Yong, 2012). The funds raised from the private equity market are generally sourced from those investors who are known as ‘limited partners’ which are then assigned to the respective investments with the help of the fund managers (also called ‘general partners’).
If interest rates are determined on a different basis for assets and liabilities then a firm having loans and debts will face basis risk. A company faces basis risk when the interest rates on its loans and debts are determined using different basis. (Buckley, 1996) Assume for example that Junor Plc issues a fixed rate bond to fund its financing needs and at the same time gives out a loan to another party at a floating interest rate.
The most important consideration is what form of capital structure would be most helpful in maximizing the firms value. This paper seeks to address the issue of what constitutes an optimal capital structure, and what