...earn any interest. Thus the bank’s profits are low, and stock in the bank is not a good investment. 3. If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don’t have any excess reserves to loan out? Why or why not? What options are available for you to provide the funds your customer needs? No. When you turn a customer down, you may lose that customer’s business forever, which is extremely costly. Instead, you might go out and borrow from other banks, corporations, or the Fed to obtain funds so that you can make the customer’s loan. Alternatively, you might sell negotiable CDs or some of your securities to acquire the necessary funds. 4. Why has the development of overnight loan markets made it more likely that banks will hold fewer reserves? Because when a deposit outflow occurs, a bank is able to borrow reserves in these overnight loan markets quickly; thus, it does not need to acquire reserves at a high cost by calling in or selling off loans. The presence of overnight loan markets thus reduces the costs associated with deposit outflows, so banks will hold fewer excess reserves. 5. If...
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...interest rate affects stock market price. Low interest rate decreases the cost of capital and increases the confidence of investors. The equity risk premium is the "extra return" that investors collectively demand for investing their money in stocks instead of holding it in a risk less or close to risk less investment. As a consequence, equity risk premium reflects both investor hopes and fears about stocks, rising as the fear factor increases. As a measure the equity risk premium can be an individual stock or the overall stock market provides over a risk-free rate. And the size of the premium will be a standard to compensate with a higher premium in the stock market. Thus, a portfolio manager when the equity risk premium increases in the future， the investors will sell out stock market because the stocks are over priced. So the legislators and pension administrators decide how much to set aside to meet future pension obligations, based upon assessments of equity risk premiums. However the history data of ERP (Equity Risk Premium) from Federal Reserve System shows it keeps low and stable state but increases suddenly since 2006. At the same time the Federal Funds Effective Rate goes down and keeps low state. We know that interest rate is a way to control inflation. Inflation is a factor causes too much money chasing too few goods. “Changes in the federal funds rate affect the behavior of consumers and businesses, but the stock market is also affected,” Said...
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...NBER WORKING PAPER SERIES THE EFFECTS OF QUANTITATIVE EASING ON INTEREST RATES: CHANNELS AND IMPLICATIONS FOR POLICY Arvind Krishnamurthy Annette Vissing-Jorgensen Working Paper 17555 http://www.nber.org/papers/w17555 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011 We thank Jack Bao, Olivier Blanchard, Greg Duffee, Charlie Evans, Ester Faia, Simon Gilchrist, Robin Greenwood, Monika Piazzesi, David Romer, Thomas Philippon, Tsutomu Watanabe, Justin Wolfers, and participants at seminars and conferences at Brookings, Chicago Fed, Board of Governors of the Federal Reserve, ECB, San Francisco Fed, Princeton University, Northwestern University, CEMFI, University of Pennsylvania (Wharton), Society for Economic Dynamics, NBER Summer Institute, the NAPA Conference on Financial Markets Research, and the European Finance Association for their suggestions. We thank Kevin Crotty and Juan Mendez for research assistance. This paper was prepared for the Brookings Papers on Economic Activity Fall 2011 issue. We have received an honorarium for the presentation of the paper at Brookings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w17555.ack NBER working papers...
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...Reaction to Federal Reserve Policy? Ben S. Bernanke Kenneth N. Kuttner∗ February 7, 2003 Abstract This paper analyzes the impact of unanticipated changes in the Federal funds target on equity prices, with the aim of both estimating the size of the typical reaction, and understanding the reasons for the market’s response. On average over the May 1989 to December 2001 sample, a “typical” unanticipated 25 basis point rate cut has been associated with a 1.3 percent increase in the S&P 500 composite index. The estimated response varies considerably across industries, with the greatest sensitivity observed in cyclical industries like construction, and the smallest in mining and utilities. Very little of the market’s reaction can be attributed to policy’s effects on the real rate of interest or future dividends, however. Instead, most of the response of the current excess return on equities can be traced to policy’s impact on expected future excess returns. JEL codes: E44, G12. 1 Introduction The reaction of the stock market to monetary policy is clearly a topic of intense interest both to market participants and policymakers. Those holding equities would obviously like to know how possible Federal Reserve actions might affect the value of their portfolios. Similarly, an estimate of the likely effect of policy on asset prices is an important ingredient in assessing the transmission of monetary policy through the “wealth effect.” The size of and of Governors of the Federal Reserve...
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...balance sheet identify the main sources and uses of bank funds. What alternatives does a bank have if it needs temporary funds? What is the most common reason that banks issue bonds? (15) On a typical balance sheet, the main sources of banks funds (liabilities) are the following: * Transaction deposits * Savings deposits * Time deposits * Money market deposit accounts * Federal funds purchased * Repurchase agreements * Eurodollar borrowings Its main uses of funds (assets) are the following: * Cash * Loans * Investment securities * Federal funds sold * Repurchase agreements * Eurodollar loans * Fixed assets If a bank needs to get temporary funds, the alternatives are the following: * Federal fund market * Discount window * Repos * Eurodollar borrowings The most common reason banks issue bonds is to purchase fixed assets. Define federal funds and federal funds rate. Who sets the federal funds rate? Why do banks invest in securities, even though loans typically generate a higher return? (5) Federal funds are loans that banks make to each other to meet the reserve requirement set by the Federal Reserve. These loans are usually overnight, since the reserve requirement needs to be met at the end of each day. The federal funds rate is the interest rate on the loan. The rate is not directly set by anyone, but dictated by the market. The rate changes in response to changes in supply and...
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...Ten-year Treasury Bond- intermediate target; not directly affected by the tools of the Fed b. Monetary Base- policy instrument; directly affected by the tools of the Fed c. M1- intermediate target; not directly affected by the tools of the Fed d. Fed Funds Rate- policy instrument; directly affected by tools of the Fed 21. Disagree. While the nominal interest rate is easily observable, the real interest rate depends on inflation and therefore can be more difficult to measure, making reserve requirements more measurable and the preferred policy instrument. 22. Bank behavior can cause money growth to be procyclical because when interest rates rise, they decrease reserves and increase borrowing from the Fed. Both of these behaviors lead to a higher money supply. Fed behavior can cause money growth to be procyclical an interest rate target can lead to a slower rate of growth of the money supply during recessions and a more rapid rate of growth during booms. 24. An increase in the demand for reserves will lead to a rise in the money supply if the Fed has an interest-rate target because the increase in demand for reserves raises the federal funds rate. The Fed will buy bonds to maintain the interest rate target. The open market purchase will then cause a rise in the money supply. Chapter 20 4. The theory of purchasing power parity predicts that the Japanese price level rising by 5% relative to the price level in the US will cause the Japanese yen to fall 5% in terms of dollars...
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...end of August 2012 there were 3.6 million job openings on the last business day as there were in July. The Department of Labor stated that there is an employee hire rate of 3.3% and a separation rate of 3.3%; this is part of why the number of job openings did not change from July to August. The number of job openings changed in all industries except accommodation and food services, in these areas the numbers decreased. Overall this is an increase from 2009 where there were 2.4 million job openings. In 3 years we have increased the number of jobs available by 1.2 million jobs. Of this increase the amount of government jobs changed very little, jobs increased for nondurable goods manufacturing, wholesale trade, finance, insurance, and federal government. Most of the job openings are in the North East of the US and in the South. Positions decreased in mining and logging careers, this trend may stay on a decline due to the change of public interest. We are trying to conserve trees so logging positions are not as in high demand as they have been historically, we use more electronic communication than paper and we recycle, this all contributes to the decline of the logging demand. We are still building houses, and there is a need for logging to provide wood for homes, but even there we are using recycled materials and finding alternatives. Mining industry is also going to stay on the decline due to finding alternatives to energy. We are moving away from coal energy and moving...
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...Economic Factors that Influence Aggregated Demand and Supply Amanda Brickey ECO/372 February 06, 2014 Ed Mendicino Economic Factors that Influence Aggregated Demand and Supply Having a solid economy is not a simple task, however possessing the ability to modify and create new ways will make for a prosperous economy. Many factors affect the economy in substantial ways. Within this evaluation of the U.S., these factors will be explained, give an overview of the current state of them, and an analysis of how they affect aggregated demand and supply. These factors include unemployment rate, expectations, and interest rates. Additionally, a set of recommendations for government spending and taxes will be offered based off the economic factors current states. As of December 2013, according to bureau of labor and statistics, unemployment average is 6.7%. Across the U.S. however some states rate has increased while others had decreased. Currently 39 states had decreases, two states had increases, and nine states had not change from November 2013 to December 2013. For most states, the ongoing lower rate is not a shock as it has continued to decline since 2009 when President Obama took office and signed in the Recovery Act and the Reinvestment Act. Since then the economy has gradually came out of the recession of 2008. Over 7.2 million jobs have been created in the past 40 months by businesses and the auto industry and American manufactures added over 500,000 jobs since January...
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...The housing market made a dramatic incline which caused an increase in foreclosures. The major investment banks took a huge fall and the stock markets fare no better either. These were events that leaded up to the economic crisis of 2008. There were three major government incentives that were implemented; the Housing and Urban Development policy, Reinvestment Act, and the Federal’s low interest rate policy. These were the incentives that the government provided that ultimately caused the economic crisis of 2008. During the mid-1900s the government set up regulations to help Americans own homes and this made it possible for lenders to lend money to everyone, regardless of income. This was the American dream that people work so hard for. So when it was made possible by the government regulations, there was no stopping Americans from jumping on that wagon. The home owing process was made possible by HUD (Department of Housing and Urban Development) regulations that required lenders like Fannie Mae and Freddie Mac to accept loans with little or no interest down (Pozen, 2010, p. 28). The loans held by Freddie Mac and Fannie Mae went from 25% in 1990 to 45% in 2001 (Gwartney et al., 2008, pg. 481). They owe about half of the United States’ mortgage markets. Then there was the Reinvestment Act that reduced the conventional lending standards to meet the requirement for banks, as Pozen stated, “to extend loans in proportion to the share of minority populated in their market area” (p....
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...Some factors that could be considered in predicting future cars sales along with interest rates are: increase in replacement demand for vehicles on the road (11 years and older), fuel economy improvements, younger consumers entering the buying market, and the car prices themselves. Looking at the example, there definitely seems to be a strong correlation between lower interest rate percentages and car sales. When the interest rate was at 3%, 1,000 cars were sold as compared to 200 cars sold at the 8% interest rate. If we use the suggestion of the VP of Marketing and use the 7% interest rate, the dealership could forecast sales of 358 cars. This, in conjunction with a R2 value of 0.997738, is why I would suggest this forecasting model. The 7% interest rate could be affected by the downturn in the economy. Other factors could be the supply and demand of credit and the federal fund rate. If less cars are sold at the higher interest rate, the dealership will affected negatively. References Sawyers, A. (2015, January 14). Analyst forecasts 17 million U.S. sales in 2015, 20 million in 2018. Retrieved from http://www.autonews.com/article/20150114/OEM09/150119809/analyst- forecasts-17-million-u.s.-sales-in-2015-20-million-in-2018 Levin, D. (2015, May 11). U.S. car sales still growing -- but for how long? Retrieved from http://fortune.com/2015/05/11/auto-industry-sales/ Sharpe, N., DeVeaux, R. D., & Velleman, P. F. (2014). Business Statistics (3rd ed...
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...billion over the past 7 years. Although misstatements are frowned upon in the accounting profession, there must be a reason why the overstatements began. This announcement raises many questions, especially by investors, as to who is responsible? There is definitely a lack of ethical behavior that must is associated with this event and one must analyze the entire situation in order to effectively account for who should be held liable. During 2007, a financial crisis began to emerge in the United States. Home ownership had peaked at 70% and the Federal funds rate had jumped from 1% to 5.25%. This partially explains why no one was interested in buying homes anymore, which led to homes dropping in price. Financial institutions, such as New Century Financial, had to start filing for bankruptcy because a large amount of their borrowers began to default on their loans. Governments worldwide employed unconventional methods to bring the interbank market back on its feet, by providing liquidity support to those financial institutions at risk of going under. Rates continued to be cut by central banks around the world to aid the widespread financial meltdown. But these efforts were not enough. By 2008, different governments worldwide created their own versions of bailout packages and nationalization. I have not been able to find any direct correlation to the 2007-2008 financial crisis and the decision of the CEO of Toshiba company at the time, Atsutoshi Nishida, to encourage misstatements...
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...benefit of this leg can be locked since both are fixed rates. So, as long as LIBOR is bigger than OIS rate, entering the trade can make arbitrage profit. In this case on Friday, August 13, 2010, using the data in the article, we get the payoff=(3.875%-3.445%)+(0.369%-0.165%)=0.63% The positive payoff is a proof to recommend GIC do the bond/swap trade, but there also exists some risks. The first risk that needs to be concern is the rolling position of repo. If the repo rate, which tracks the effective Fed funds rate, goes up, GIC needs to pay more and more money for the old debt before it can borrow new. And there would be increasing difficulty to finance in repo market, because as interest rate goes up, the value of government bonds goes down, and since the government bond is collateralized to avoid credit risk, the loan amount would be less and less. One way to avoid such risk is to take a long position of Eurodollar futures in order to hedge the increase in Feds fund...
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...the Social Security system is altered all of the money will be used up. In financial terms, the system is expected to run a cash-flow deficit as this huge fund is utilized. “Social Security is a trust fund composed of special bonds that are issued by the federal government for any excess money taken in by the system and that pay interest at the going rate. These bonds are obligations of the US government as much as any other bonds it issues. They are part of the national debt. These assets are IOUs for the money the federal government owes all present and future Social Security retirees” (Durigan, 1994) . This means like any other bond, Social Security is affected by the economy. A deficit will increase the bond price and during a surplus the bond price will drop. Although this is normally expressed by the retirement age. As Social Security is depleted, the age to cash in full Social Security benefits increases. Eventually the retirement age will be so extreme that it will be impossible to receive benefits in a lifetime. Future UoP Student Everyone who goes to college, unless incredibly lucky, has at some point taken out a loan in order to help finance the cost of education. Loans are subject to bank interest rates due to the Fed. Although the Fed doesn’t set individual rates directly, it sets the federal funds...
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...Lecture two was about how capital is allocated in three different groups (households, companies and government), more information about General Equilibrium Theory and The Efficient Market Hypothesis. Lecture two also introduces the three pillars of finance. Capital is allocated to company which purchase example new machinery or new place, to households who want’s loan to buy a new house and to government who wish to undertake higher current and capital expenditures. All these groups face the same question about the cost of loan, what kind of interest is there? Interest rates define how “expensive” loan is going to be. Short term rate is determined by central bank (base rate, repo rate, Fed Funds rate) and all others rates are determined by market force. I learned that people can be risk bearing, risk averse or risk lover. That sounds pretty weird for me at first that all people can be divided like that. In finance world if you try to get financial resources, it is also about distribution of economic risks. Some people are willing to take bigger risk to get money and some people wants to avoid risks and do “easy money” (which doesn’t even exist). Examples of risks: credit risk, equity risk, currency risk, interest rate risk and commodity price risk. Science has always tried to explain whole business functions and there are three important pillars to science. Pillar one is about optimization over time and something about time value of money. I realized that pillar...
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...impact on the economy. There were clues that the economy may have actually slightly contracted instead of expanding. “The United States economy reversed course in the final quarter of 2012 and contracted at a 0.1% rate and was the worst performance since the financial crisis in 2009.” (Mataconis, 2013) . Even with the overall contraction, the economy is not on the brink of a recession or an extended slump. Companies are still spending. The economy we have been living in since 2009 is going to be the new normal. The prime rate is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans. The current prime rate is 3.25%, federal discount rate is 0.75%, fed funds rate is 0.25%, and the 11th District cost of funds is 1.071%. Changes made with federal funds rate and the discount rate also dictate changes in the Wall Street Journal prime rate, which is the interest to borrowers. (Bankrate.com, 2013) The current fixed interest rate for credit cards is 13.02% and for variable interest rate for credit cards are at 15.14%. “The unemployment rate falls to 7.8% as the economy creates 114,000 jobs.”...
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