Money & Exchange of Rate

Topics: Money supply, Economics, Inflation Pages: 22 (7659 words) Published: April 3, 2013




“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, measured the interest rates in a different variety of government bonds, over time. Bond Rating Exist the called risk-rating agencies, in charge of classifying the bonds in based of, the likelihood of defaults. These ratings, ranging from AAA, the best to the C. So BAA bonds classification or above are considered "investment grade", while the rest are called "junk bonds." BANKS Banks are financial intermediaries, its function is to transfer money from those who want to lend to those who want to borrow. 2

“Money, Interest Rate and Exchange Rate” International Economics

For an economy to function properly, you need to have a well-developed financial sector and solid. Banks develop a very important role as a medium of exchange, banks nowadays are involved indirectly in almost every transaction we make. The truth is that without banks people could not get loans or do investments, actions that are essential to leading a productive and rewarding life. How do banks make money? The basic structure and business model of a bank are universal worldwide. Banks make profits by charging a higher interest rate on the money they lend out, than the money they has as deposits. Another ways the bank has to make money is through financial counseling or other services. For individuals, such services may take the form of investment or insurance advice, whereas for firms help for the issue of shares or bonds. This is the primary function of investment banks, which also invests part of its surplus, cash in the hope of obtaining additional profits. Bank Reserves Are defined as, cash deposits that financial institutions have to maintain in the country's central bank, known as coefficients required. These deposits vary according to the demand for money, is expected to have. The Central Banks are who control the amount that banks must hold in reserve. Bank Runs The modern banking system works great when the economy is doing well and savers are confident that their money is safe. In times of...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Linked Exchange Rate System Essay
  • Call Money Rate in Bangladesh Essay
  • Exchange Rates Essay
  • Modules for Exchange Essay
  • Essay on United States Dollar and Exchange Rate
  • Debt and Exchange Rate Essay
  • Essay on China's Exchange Rate

Become a StudyMode Member

Sign Up - It's Free