Even though most of us may not realized it, interest rate actually play an important role in our everyday lives due to its great effect on the buying power. For instances, if the interest rate is higher, people tend to reduce their spending and rather save it in the deposit account due to the large interest that they can gained. However, if the interest rate is lower, they rather spend it than keeping it in the deposit account. The reason for this is because the ups and down of the interest rates have a significant impact on their personal income. Furthermore, since interest rate have a major impact on investment it is important for the investors to keep track on these interest rate’s trend before making any decision.
It is important for any people who are dealing with interest rate to understand the term structure of interest rate or also known as a yield curve. It is a plot that reflects the relationship between the maturities and interest rates of a security as well as the different pattern it made at different times. There are three different type of shape that are created by the term structure of interest rate.
1) Normal yield curve – it is an upward slope yield curve in which short-term securities have lower yield than long-term securities. As the name suggested, the shape essentially indicate the normal condition in the market where investors believe that there will be no significant changes in the economy such as that the economy will develop at a normal rate. It is actually a normal expectation of the market to offer higher yield to long-term security as compensation because they hold more risk than the short-term security.
2) Inverted Yield Curve – It is a yield curve in which long-term securities have lower yield than ...
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...at choose long-term securities. This is due to their business nature that require long-term securities such as companies that involves in project that have long development period. Hence, the yield curve is generally upward sloping.
3. Liquidity premium theory – It is a theory that suggested that the yield of securities in one mature have influence on the yield of another securities. The investors are willing to invest in long-term securities as long as they are provided liquidity premium as compensation due to their long exposure to the long-term risk. As a result of this compensation, the investors are more motivated to in long-term securities. Hence, creating an upward sloping yield curve.
There are many factors that can affect the yield curve which is usually according to the economy’s situation. Below are some of the factors that can affect the yield curve.
Setting the rate of interest (i) creates a horizontal LM curve, setting the money supply (M) has a sloped LM curve. This is illustrated in the diagrams below:
The high yield bond is a bond that features higher returns but with a lower credit rating than typical investment-grade bonds. These bonds can also be referred to as ‘junk bonds’ that are rated as below investment grade by organizations such as Moody’s and Standard and Poor’s. [Appendix #1] Generally, companies that issue high yield bonds may receive their rating due to a few characteristics, such as being less established than typical household brands, showing weak financial performance or they may have suffered a financial setback at some point in their corporate history. Although, high yield bonds may seem to have a relatively negative reputation among investors they possess many attractive advantages which include: diversifying portfolios, greater yields, lower volatility thus makings for a good long-term investment and the fact that bondholders have priority of recovering their money over equity security holders in the case of bankruptcy. These bonds are accessible to investors either as individual issues or through the means of high-yield mutual fund investments. On the other hand, there are certainly risks involved when investing in high yield bonds, such as credit risk where there is the possibility that the issuer defaults on the principal or interest payments over the course of the term and investment in these bonds ultimately depends on how informed the investor is and the amount of risk the investor is willing to tolerate. Similar to other types of securities there is always the threat of economic downturn and risks occurring when investing in international markets, such as political and exchange rate risks. In contrast, high yield bonds are able to mitigate interest rate risks better, and are less vulnerable to drast...
Our government has a strong motive to inconspicuously economically manipulate its citizens by changing interest rates. When interest rates ...
...re sharply from one month to another. As depicted in the chart below, managed futures performance increased, while equity performance steadily declined. The equity sector out performed managed future as interest rates declined producing 1.0 percent returns on a monthly weighted average, while managed futures produced 0.14 percent. Conversely, however, as rates sharply increased managed futures returned 1.03 percent, while the equity sector was down -0.73 percent. The chart indicates that not only are managed futures agnostic to rate direction, but managed future funds are also uncorrelated to the equity market.
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
Historically, the Malaysia Government Bond 10Y reached an all time high of 5.35 in April of 2004 and record low of 2.87 in January of 2009. Thus, the bond market in Malaysia are normally fluctuate, the risk taken by the bondholders could be minimized by getting ready homework about the bonds which are going to buy with. Bonds can be a great instrument to generate income and widely considered to be a safe investment, especially compared to equity securities such as stocks. However, However, investors need to be aware of some potential traps and risks to holding corporate and/or government bonds. Let us expose the bonds potential risks. Firstly is the inflation risk. When an investor buys a bond, he or she crucially commits receiving a rate of return, either fixed or flexible, for the period of the bond or at least as long as it is held. But what happens if the cost of living and inflation increase dramatically, and at a quicker rate than income investment? When that happens, investors will see their purchasing power corrode and may actually achieve a negative rate of return (because of factoring in
the model of supply and demand to describe the Treasury bond market and to predict the
Interest rate is inversely related to stock prices and exchange rate. Interest rate is the rate at which interest is paid by the borrowers for the use of money which they borrow from lenders and also used as a discount rate to discount future cash flows of the financial assets, Interest rates often change as a result of inflation and Federal Reserve Board
...is the security market line which is the liner relation between risks and returns (Watson & Head, 2006). In the security market line investors want bonus added to what they receive on a risk-free investments to make them invest in something risky such as shears (Arnold, 2008). That makes the security market line important for the investors because is identifying the risk in the market as a systematic risk (Arnold, 2008), which needs to be compared with risk and return of the market and with the risk-free rate of return. This comparison is necessary to calculate tow things which are: the demanded return for the security and the fair price (Watson & Head, 2006)
A bond is basically a loan that investors are giving to the government or an institution in exchange for a pre-set interest rate paid regularly for a specified term. The foremost purpose of buying bonds is their safety. However, there is a little potential return as compare to other securities.
When a firm wants to take on long term debt, there are two main sources that it might consider. It can certainly borrow from its bank and obtain a loan in the traditional way, by signing a loan agreement or promissory note. It can also borrow directly from the market by issuing bonds. So, let 's take a look at what bonds are and some of their main features and characteristics. At its simplest, a bond is a financial instrument, issued by the firm the represents its intentions to borrow for the long term and its promise to repay.
Personal Finance is a class I’ve wanted to take for a while now. My major is Finance not because I want a career in finance but more to learn about finance for my own personal situation. This class taught me so much! During this class I was able to evaluate my financial situation and set financial goals for myself. The four topics that helped me the most were emergency savings, buying a car, purchasing a home, retirement, and estate planning. After completing this class I have a better understanding of these topics and how to achieve my financial goals.
Bond is a kind of security and debt instrument created for raising capital. Borrower (issuer of the bond title)
Saving money brings security for any future expenses. The earlier in life an individual begins to save, the better they will be set financially in the years to come. There are several reasons why it is important to save money. A few of these reasons are for emergencies, retirement, and simply for luxury spending. Having money will benefit each of these examples.
"Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per period of time, usually one year" (Getobjects.com, 2004). An interest rate is a very important factor in all financial decisions. The two types of interest rates are simple and compound (Brealey, Myers & Marcus, 2003). A simple interest rate for example, occurs when a person borrows money from a lender and he or she will have to pay the lender a fee, this fee is the simple interest rate (Brealey, Myers & Marcus, 2003). Simple interest is normally used for a single period of less than a year, such as 30 or 60 days [simple interest = p x i x n] (Getobjects.com, 2004). For examp...