Week 5 Team Reflection

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Team Reflection
Belle Villarreal, Laura Flores, Kimberly Simmons,
Stephanie Nelson, Kenneth Humphrey
ECO 561
June 9, 2012
Ron Merchant

Introduction

Week Five’s focus was Credit Market and Globalization. The objectives we focused on were the effect of credit markets on the economy and the effect of global economic conditions regarding trade and specialization business decisions. Team C will discuss what we felt comfortable with and what we struggled with and how the weekly topics relate to applications in our various fields. Interest Rates

It was interesting watching the Components of Interest Rates video. Before viewing this video I never understood the different factors of inflation. The risk-free rate is important to investors to calculate the safe minimum (risk-free) that investors expect their money to lose. The risk premium is the amount of interest lenders add to the risk-free rate to compensate for uncertain pay-offs. I can relate to this video because interest rates are a factor when I purchase a car, or am looking to purchase a new home. I found an interesting chart on Bankrate.com (2012) that describes the current three-month mortgage interest rates.

Since March the interest rates have decreased, except for one peak in early April. Viewing these interest rates is interesting as a soon-to-be home buyer. It is a comfort knowing interest rates for mortgages are decreasing! This is one area of this week I can relate to and feel comfortable with because I have viewed interest rates since I was on my own, and purchasing my own goods. Interest rates are a part of my decision to buy a car, home, enroll in a credit card, or determining type of savings investments to put my hard-earned money in. Interest rates play an important role in my organization in determining the best time to take out a loan. Lower interest rates will significantly impact the organization’s payments back to the lender because with large loans interest (whether low or high) will play a part in how much is owed to lenders. Current Credit Market

Varying situations in the credit market greatly affect an organization’s financial decision making. Organizations use the credit market in some way. For example, many firms look at the yield curve as a predictor of the business cycle. Other important aspects of the credit market include interest rates, bonds, and the cost of capital. A business manager must analyze, review, and understand the current credit market to make sound financial decisions. Locate an article about the current credit market. Create a chart or graph depicting the key points of the article.

The article Corporate Bonds Benefit from Fed, too is about the Federal Reserve’s statement “to dump Treasury bonds and move into other assets” (Levine, para. 1, 2012). In recent months corporate bonds have seen interest from investors trying to search for higher yields. The Federal Reserve acknowledges improvement in the economy, compressing yield spreads (Levine, 2012). The gap between corporate and Treasury yield declined to 1.94 percentage points, the lowest spread since last fall and down 2.60 points from February (Levine, 2012). With the risk of rising rates many investors are moving funds to Treasurys in favor of credit risk, opposing longer-maturing debt that because of rate increases (Levine, 2012). If the economy continues to grow at a 2.5% pace with current tax breaks expiring at year’s end gross domestic product could be cut by 0.5% to 1%. If GDP cuts to 1% the Federal Reserve steps in (Levine, 2012). The following chart depicts how the concerns of investors concerns about percentage points for yields. The 52-week high is 3.23 in July, and the 52-week low is 1.44 recently in May. For the past few months the yields have been decreasing resulting in a high concern among investors.

Global Economic Conditions Analysis

Consumers make choices all day every day when making purchasing...
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