1.
There are many different types of financial markets that operate for example money market, future market, the bond market, etc. I will be discussing bond market and their influence and impact on U.S. markets. In financial terms, bond is a debt security, which is normally issued by the government institutions and financial corporations in order to manage their financial operations and daily working operations. A bond can be a treasury bond, a corporate bond, a junk bond or a municipal bond. When the bond is issued by the agency to the bond holder, they are basically issuing a promise or a debt in the form of paper as a legal instrument with commitment that the capital investment amount plus the interest payment will be returned to the bondholder at the bond maturity date. (Chakravarty, 2003)
The interest that is paid on this bond to the bond holder is known as the coupon payments and is generally paid either semi-annually or at annual basis to the owner of the debt instrument. There are different bond types and depending upon the bond classification the coupons are paid on either fixed rate and given according to that or at different changing rates that are linked with economic interest rates and change over time till the maturity period of bond. The maturity of the bond can range from one year to fifty years depending upon the type of bond category.
In many cases, the holder of the bond may not want to hold the bond for long or till the agreed time of maturity of the bond and may want to sell it beforehand in a secondary market in order to regain the capital amount back. One classification of bond is also known as convertible bonds that can be easily transformed into stock by the holder of the bond. Bonds are an important part of U.S. economy and are considered to be a valuable because of their profit and business impact the bond trading activity has on the U.S. economy. The bonds tend to make business operations more profitable, and the investment is secure as the bonds are floated by the companies that have good credit rating or the government institutions that have a secure future. Hence for the investors and the companies this is a direct route for gaining profits and capital for their business operations. (Chakravarty, 2003)
2.
Many factors impact the interest rates. First and foremost is the economic growth. When a change occurs in the economic conditions of the economy, a shift occurs in the demand schedule of the loans. (Madura, 2010) If a business projects that the economic conditions will improve, they are willing to borrow funds from banks and other financial institutions in order to expand and develop projects that result in the outward shift in the demand curve of loans and result in an upward pressure on the interest rates. When there is a downturn in the economy, the reverse reaction is witnessed in the above-mentioned situation.
Another factor that can cause an impact on the interest rates is the inflation rate. Inflation is rise or fall in prices of goods which directly impacts the consumer spending power. When it is predicted that prices will increase, the consumers and businesses mostly make their purchases or book their orders or merchandise before the price increase deadline. In this situation, the businesses and the general consumer are willing to borrow more loans in order to make the early transactions. This change in the consumer spending power results in the inward shift of loans and an outward shift in demand curve of funds. (Madura, 2010)
Third factor is the role played by The Federal Reserve in order to maintain the money supply in the economy. The Federal Reserve of any country has the power to increase or decrease the money supply through selling or purchasing debt securities and other commodities. When the Federal Reserve issues a stimulating monetary policy, the money supply increases in the economy which increases the supply of loanable funds into the system. This policy produces downward pressure on the interest rates. When the deficits increases in the economy, the Federal Reserve produces more loanable funds for the economic system, that results in an increase in interest rates. (Madura, 2010)
Fourth factor that impacts the interest rate is the exchange rate fluctuation. When the exchange of other country currencies takes place, a change in the money supply, brings a change in the interest rates of the economy. When we compare all the factors, it can be said that Federal Reserve is by far the strongest factor because not only it has its own impact but all affects other factors and the monetary policy that Federal Reserve offers help in increasing employment opportunities, stabilize the market prices and produce long-term rate of interests for economic transactions. (Madura, 2010)
3.
The forecasting of interest rate movement is most righted analyzed when the value of the equilibrium is determined by factors in the economy such as demand and supply of funds, interest rates, etc. It is important that current and historical trends should be considered and evaluated. The future demand should be analyzed and predicted. It is important that the demand of household consumer and government parties and institutions should be developed, and future savings should be regulated in order to forecast. (Fox, 2005)
4.
The Federal Reserve is the main central bank of the United States. It was founded in 1913 to provide the country with safer and flexible transactions and a proper monetary policy for the business operations to process in. The Federal Reserve system has major roles to play in the economy. The first role is to create policies that have a positive impact in providing stable working environment, more jobs and employment opportunities, stable interest rate condition and stable credit situation in the financial system. It is the responsibility of the Federal Reserve to provide the banking sector with a clear set of regulations in order to protect customer rights and their investments and to control the credit rights. Almost all the countries have their own state banks, and they are able to comprehend the financial systems and monetary policy of each other. Without the proper banking regulations and a control system by state bank, the financial system of the economy will not operate properly. (Fox, 2005)
5.
In the latest monetary report published in Feb 2014, it was stated that as a whole the U.S. financial system has performed well and had strengthened its roots. Liquidity condition of the major companies have improved and banks have started to show financial stability. Federal Reserve has taken steps to strengthen the capital market to improve the financial conditions further. The use of leverage has been restricted lately, and the asset market has performed as per the forecasting. Overall the system has performed as the stated measured and the shock capacity of the economic and monetary system as improved. (Monetary Policy Report, 2014)
6.
As a financial manager, my first step will be to organize my sets, goals and targets that are needed from the project. The main objective is to expand in the world of corporate bond by constructing a new plant. US$ 10 million will be required for the upcoming project, and I have decided that the company will issue 10,000 bonds at face value of US$ 1000. A five-year bond that will pay a coupon of 2.6%, a ten-year bond will pay a coupon of 3.8% and a twenty-year bond will pay a coupon of 6%. All bonds are expected to complete their tenure of the maturity date. (Fox, 2005)
References
Chakravarty, S. & Sarkar, A. (2003). Trading Costs in Three U.S. Bond Markets. Journal of Fixed Income, 13(1), 39-48.
Fox S. Lynn. The Federal Reserve System: Purposes & Functions (2005) Ninth edition. Federal Reserve Publications Committee. Washington, D.C.
Madura, Jeff (2010) “Financial Markets and Institutions” Customs Ed. Cengage Learning. Mason, Ohio. http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm
(Feb, 2014) “Monetary Policy Report” http://www.federalreserve.gov/monetarypolicy/files/20140211_mprfullreport.pdf
