Money, Bond, Returns, And Amortization Schedule Essay

this report is going to discuss the money market and how interest rates are determined, it will then look at the effects of lowering and raising interest rates and the limitations of these effects. the money market is a section of the financial market where short term loans and financial instruments are traded, for example these could be short term loans between banks with the debt maturing in less than a year.

Money market securities are short term instruments created by governments and corporations to obtain short term funding. Treasury bills (T-bills) are common instruments used in the money market and are issued by the U.S. government. Moreover, T-bills are used by the government to refinance maturing debt and to cover budget deficits. The Federal Reserve also uses T-bills as a fundamental technique to implement monetary policy (Saunders & Cornett, 2015). If a one purchases a T-bill that is 90 days from maturity, for $9,970 and with a face value of $10,000, the quoted yield is 1.200%, the bond equivalent yield is 1.2201% and the EAR is 1.222% (see Table 1).

Previously stated, the federal funds rate was cut to as low as 1% during the early 2000’s. Not only did this turn investors away from investing in treasury bonds, but it also cheapened the cost of borrowing money for banks. This spurred action on behalf of financial institutions to offer investments connected to the continually increasing, and seemingly risk-free, housing market. Due to a combination of greed and ignorance on behalf of financial institutions and credit rating agencies, the proverbial housing bubble increased until it finally reached its peak in 2006, and then began to burst at the end of that year and on into 2007. What exacerbated the decline to such a high degree was the strong connectivity of the financial institutions through their complex transactions that related to mortgages. The main factors that were involved in the impending crash were the increased offering of subprime mortgage loans and collateralized debt obligations, or CDOs. Critically analyzing the effects of these products will aid in the conversation of financial institutions role in sparking The Great Recession.

During the mid-1990s, the US economy had maintained stable growth, low unemployment, and low inflation; it was the longest undisrupted growth period post- the Vietnam War, the Dot.com Boom, and the stock market crash of 1987. Therefore, many politicians, economists, and consumers were under the assumption that the economy was very stable. But in reality this growth period was a façade because it was built on mortgage-backed securities. Ultimately, since fragility does not change, mortgage-backed securities was one the main catalysts for the 2008 financial crisis, a crisis that is still affecting the country today. Throughout this paper, I hope to inform you about the causes and effects of mortgage-backed serecurties.

The commercial and cooperative banks use T-Bills for fulfilling their SLR requirements. Advantages of Treasury Bills Objective of issuing T-Bills is to fulfill the short term money borrowing needs of the government. T-bills have an advantage over the other bills such as: Zero Risk weightage associated with them. They are issued by the government and sovereign papers have zero risk assigned to them High liquidity because 91 days and 364 days are short term maturity. Transparency The secondary market of T-Bills is very active so they have a higher degree of tradability. Treasury Bills are issued only by the central government in India. The State governments do not issue any treasury bills. Interest on the treasury bills is determined by market forces. Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000 There are no treasury bills issued by State

Founders’ termination term is very important for Laracey because it increases the possibility that the unvested equity of the founders could be accelerated when the incoming CEO terminates them. It directly protects the benefits of the founders.

And the other causes are securitization practices, inaccurate credit ratings, government policies, policies of central bank and financial institutions debt levels. Securitization is structured finance process in which assets, receivables or financial instruments are acquired, pooled together as collateral for the third party investments( Investment banks). There are many parties involved. Due to the securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others that began in 1970. Now things start to get complicated. Pieces of mortgage-backed securities can be inserted into new investment vehicles, with a remarkable result: investments originally rated as risky can re-emerge rated as safe. This can be done when An investment bank creates a new security from risky slices of multiple securities. In

Before any of the risky moneymaking endeavors, investors traditionally would have gone to the US Federal Reserve to buy treasury bills, a safe and profitable investment. Later, when interest rates were lowered to only 1% in

A 1)Working capital requirement = Accounts receivable + Inventories + Prepaid expenses – Accounts payable – Accrued expenses

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and

Previously banks extended credit to the applicants for mortgages and these mortgages were kept in the books of the banks and they were accountable and responsible for any default. Therefore, inorder to alleviate the chances of default, due diligence (inquiry of credit history) was exercised. However, major drawback to banks was that their funds locked up for long time period. Therefore new phenomenon was introduced according to which the originators of mortgage loans could sell that mortgage rapidly in the secondary market in the form of securities. This was also termed as originate to distribute model. For implementing this concept,mortgage backed securities were created through which the mortgage initiator would sell the streams of mortgage loans to the investment banks which would later sell it to the investors and they would receive the interest payments.

Trouble started in 2003 with the housing boom, mortgage interest rates had greatly decreased. As home prices rose, a low interest rate allowed for ‘affordable’ mortgage payments for all buyers. Investors, both foreign and domestic searched for investments that yielded low risk and average returns, their answer came in the form of mortgage backed securities. Investors and Wall Street firms

Banks can use it as a useful tool to make more loans and to maintain a higher capital level. However there are risks attached with this financial innovation, as securitisation played a role in the financial crisis in 2007 through sub-prime mortgages. This essay will discuss the process of securitisation, bank’s motives for using it, its advantages and the risks. There are three types of securities: Collateralised Debt Obligations (CDO), mortgage backed securities (MBS) and asset based securities (ABS).CDO are a form of security that are asset- backed, they allow banks to group cash- flow generating assets (loans, mortgages and bonds) into a SPV. Investors choose which tranches they want to buy based on their varying risk and returns. MBS

Financial markets play a critical role in the accumulation of capital and the production of goods and services. The price of credit and returns on investment provide signals to producers and consumers—financial market participants. Those signals help direct funds (from savers, mainly households and businesses) to the consumers, businesses, governments, and investors that would like to borrow money by connecting those who value the funds most highly (i.e., are willing to pay a higher price, or interest rate), to willing lenders. In a similar way, the existence of robust financial markets and institutions also facilitates the international flow of funds between countries.

Money market is the short-term loan market which is less than one year maturities with relatively liquid and low-risk debt due to short duration. Governments and large corporations are usually issued the money market securities in forms of banker’s acceptance,