“Money, Interest Rate and Exchange Rate” International Economics
KEY CONCEPTS: Finance & Markets Before you jump right to the main topic of our project we need to clarify some concepts that will be of great help in understanding the topic, "Money, Interest Rate & Exchange Rate". BONDS MARKETS The international bonds markets is, where firms and governments raise money; are less known than the equity markets but are more influential and important. The price of sobering bond reveals how creditworthy a government is, how its politicizes are regarded and how easy it finds it to raise cash. Definition of a bond, a kind of debt that promises to pay the holder a specified sum at some point in the future, plus some interest over the life of the bond. Interest Rate Interest is the key, the real power lies in the bond interest rate, which is determined by the market and it can be different from the advertised on the bond itself. If investors believe that a government is at risk of default, thereby exist high probability of increasing the inflation. This will cause a double effect, reduces the price of the bond and increases the effective interest rate you pay for it. Economic significance, the more risky it is an asset, investors paid less for it and bigger should be the compensation for holding it. Origins of Bonds The bond market was born in medieval Italy, when often the wealthiest citizens were forced to lend money to the city-states, which were in war often, in exchange for a regular payment of interest. Until the Napoleonic period the bond markets were not truly influential. By then the British government issued various types of bonds, including the "TONTINE" and the most popular "CONSOL". Yield Curve Yield curve,...