Finance -the Market Essay

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1. How can changes in foreign exchange rates affect the profitability of financial institutions?

Foreign exchange rate determines the price exchange of two currencies. Changes in these rates affects the amount of goods and services import and export of a country. When a country currency is stronger, it is now exchanged for more goods than before, and once the currency is weaker, less of goods are purchased for the same amount of the currency. Financial institutions use the exchange rates changes to decide whether to buy/sell financial assets such as bonds, stocks, etc. That means, they will buy and sell foreign assets to gain profit. The value of these assets increases or decreases as the exchange rates change. If the dollar
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When the economy is expanding, the spin of money is faster where income of individuals and business increases, and so there’s more likelihood to spend money than before the expansion. For that reason, all stays equal, businesses would want to take advantage of this condition, and would raise funds to pay for new investments, which will raise the supply of bonds in the market. At a similar rate, the effect of the economy expansion (the increase in jobs, income, and savings of potential investors) on the demand for bond in the market will be positive. More people can afford and are able to buy bonds for investments. Therefore, economy expansion increase demand and supply of bonds. If excess of demand for bonds is over supply, the price of bond will increase due to insufficient supply, and so interest rates will fall. If excess of supply of bonds is over demand, the price of bonds will fall and thus interest rate will rise.

5. Consider the decision to purchase either a 5-year corporate bond or a 5-year municipal bond. The corporate is a 12% annual coupon bond with a par value of $1000. It is currently yielding 11.5%. The municipal bond has an 8.5% annual coupon and a par value of $1000. It is currently yielding 7%.
Which of the two bonds would be more beneficial to you? Assume that your marginal tax rate is 35%.

Municipal bond:
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