Finance Forum Post Replies

I need a 100 word reply to each of the following 8 forum post (800 words total). They are all from a finance course.

Forum #1

Supply and Demand Model
            Let's go with a 30-year Treasury Bond, purchased for $1,000, at 2.7% (treasury.gov). Since the Supply and Demand Model revolves around equilibrium of the two factors, that will be my answer as to how the interest rate is determined. Don't worry, there are more specifics!

            There are 5 key factors that affect the Demand Curve of bonds: wealth, expected returns, risk, liquidity, and information costs (Hubbard, 2013). Why does wealth affect the Demand Curve? That's an excellent question, so let me explain. The more money people are making, the more they should be saving. Now, the larger their wealth, the difference in amount of their assets and liabilities, the more they can spend on...oh, I don't know, BONDS. Now, since there, hypothetically, is a higher demand for bonds, this causes the demand curve to shift to the right, in turn allowing for higher bond prices (which is the cause and effect of equilibrium. 
            Next is expected return on bonds. If, and only if, the expected return on bonds rises in relativity to the expected return on equivalent assets, will there be a shift to the right in the demand curve (Hubbard, 2013). Therefore, if the expected return on bonds is less than the expected return on common stock, the demand curve will shift to the left (in a negative manner). 
            Risk is #3 in the order of factors affecting the demand curve. Risk works the exact same way as the expected return on bonds, but in a reciprocal manner. This means that a decrease in riskiness on bonds (relative to other assets) will cause the demand curve to shift to the right (positive); meanwhile, an increase in riskiness (relative to other assets) will cause a shift to the left (negative). 
            This next one is very simple, so watch closely. In regards to how liquidity affects the demand curve: the higher the liquidity of bonds, the higher the demand, and vice versa. 
            Information costs are(is) the final factor. These(this) are(is) also very simple to grasp, so buckle up. In the event that accurate and useful investing information on bonds is made cheap(er), the demand for bonds will increase by shifting the curve to the right; the same is true if convenience plays a role. On the flip side, if information is restricted, inconvenient, or expensive, the demand will decrease by shifting the curve to the left. 
*whew*
            Thank the Lord Almighty, there are only 4 factors affecting the Supply Curve: expected pretax profitability of physical capital investment, business taxes, expected inflation, and government borrowing (Hubbard, 2013). 
            Expected pretax (etc.) affects the supply curve in this ridiculously short and understated answer- if a firm, that issues bonds, believes their physical assets will bring about tremendous (at least adequate) profits, they will issue more bonds, which is equal to more supply.
            Next is business taxes: these usually are the after-effect of physical asset attainment. Basically, when firms purchase physical assets, they have to pay more business taxes. If taxes are raised, they will issue less bonds (decrease in supply, it goes this way <-----). 
            Expected inflation is quite forward in that if inflation increases, firms can borrow more for less. Therefore, if inflation goes ^^^, the supply curve goes --->.
            Lastly is government spending...*sigh*. As far as I understand, when there is a budget deficit, and THERE IS, the government either issues bonds or increases the equilibrium interest rates.  (?)
The Bond Market Model
            I'm not quite sure, but I believe interest rates are affected by the bond market model when either changes occur in the supply, demand, or both. In recessions, inflation falls (making supply increase and demand fall). When The Fisher Effect takes place, I think, nominal interest rates increase and decrease "point-for-point with changes in the expected inflation rate" (Hubbard, 2013, p. 107).
The Loanable Funds Model
            This model is similar to, but mirrored (or reciprocal) to the Bond Market approach. When interest rates increase, so does the quantity of bonds in the eyes of those who lend bonds. 

Reference
Hubbard, R. (2013). Money, Banking, and the Financial System (2nd ed.). New York, N.Y.: Pearson.

Forum #2

In the bond market graph, it illustrates the difference in interest rates during a recession.  During a recession, the interest rates fall.  This is due to the fact that the average household wealth or income level decreases, showing less or no demand for bonds causing a lower demand for them.  Now because this particular firm is issuing fewer bonds, the supply curve slopes because the declining expectations of the profitability of investments in physical capital.  However, the equilibrium price of bonds rises, which causes a decline in the equilibrium interest rate.  If the demand curve had shown shifted to a lesser demand by more than the supply curve for bonds during a recession, the price of bonds may fall creating and increase in interest rates. 

The demand and supply model shows that if bond buyers are expecting the inflation rate to be higher, it creates a reduction in the demand for bond and an increases the supply of bonds.  When the demand for bonds decrease, the expected real interest rate investors receive from owning these bonds will fall for any given bond price.  When the supply curve for bonds increases is caused by an increase in the expected interest rate.  At this point the expected real interest rate firms pay on bonds will fall for any given bond price.

The demand for bonds may increase at some point when the government runs a deficit if households come to the conclusion that the government may raise tax prices in order for them to pay off the bonds that were issued to finance the deficit.  Households can prepare for this occurrence by putting more into their saving.  By doing so, will shift both the demand curve and the supply curve for bonds to the right which will in turn create an offset in the interest rates.  In a case like this the interest rates would not rise due to the increase in government borrowing.

Forum #3

Heads up class and Prof. Price: I'm going to use my "knowledge" and basically biased opinion, while integrating logic.

            Basically, in a quick summation, anyone with half the knowledge I have, and a quarter of the logic, should invest in neither of these ridiculous "vehicles". Straight, whole life insurance plans, with interest rates of 8% or more, are the safest, highest-earning investments vehicles in the market. I would know, because I was the Managing Director of an international insurance company by the time I was 22. 
            Moving on, if someone really had to make this unwise decision, I would go with the T-bills. In terms of risk and reward, there is almost no risk (save for... recession/depression, war, government financial lockout) and literally no reward at all (really, HALF of ONE PERCENT?!). It is seriously, one of the safest places on Earth to put money in (except a savings account, straight whole life insurance plan, checking account, etc). The liquidity of T-bills is practically 1:1, meaning if you purchase a T-Bill with a 28-day maturity date, I'm pretty sure you can wait out 2 paychecks' worth of time to collect the same amount of cash as you handed out 28 days ago, seriously. 

            And literally, here's the only reason you don't need a mortgage-backed security: if you default, your credit and assets are completely screwed, for at least as long as your bankruptcy stays on your credit record (7 years?). 

Forum #4

People are more interested in treasury bills than investing in mortgage backed securities for a few reasons.  First, treasury bills are mostly short term, ranging anywhere from a maturity of 1 year or 2 years up to ten years.  Mortgages on the other hand usually have a maturity of no less that at least 15 years but most commonly mature at 30 years.  Another reason someone may invest in treasury bills rather than mortgages is because in 2012 the Federal Reserve took to force down short term interest rates to help deal with the financial crisis.  Again this relates more to the treasury bills instead of mortgages because mortgages are long term whereas treasury bills can mature anywhere from 1 to ten years.  Although longer term rates for mortgages are under 4%, in 2007 treasury bills were not that far ahead with a rate of 4.56%.  however, in 2012 after the Federal Reserve forced down the interest rates, they had gotten as low at 0.11%.  but in all, long term rates have been known to be higher than short term rates.  As far as liquidity goes, investors prefer bonds with a short term rate due to the difference in interest rates compared to the longer term rates.  Investors will also take into consideration the yield of a short term and long term bonds, they would not buy a long term bond if it offers the same yield as a short term bond.

Forum #5

Forum #6

Staying Competitive

With technological advances, companies can expand their operations effectively and efficiently. International financial management is essential for companies to remain competitive.

The risks of international financial management, are “Foreign Exchange Risk (when individuals and firms engage in cross-border transactions), and Political Risk (arises from the fact that a sovereign nation can change the “rules of the game” and the affected parties may not have effective recourse).” Eun, C. S., & Resnick, B. G. (2015). I have an example of both of these forces at work, which come from a discussion me and a friend that lives in Guyana. On the border of Guyana and Venezuela, Venezuela trades physical currency (US Dollars) 2 for 1, which is 12.60 VEF for $1. This the result of political risk due to differences with the United States and a crisis of confidence in the Venezuelan currency. This is not a perfect example, but me and a friend of just so happened to have a relevant conversation recently.

Forum #7

International Monetary System

Discuss the criteria for a “good” international monetary system.

The criteria for a “good” IMS include: Liquidity, which is a must to support international trade and investment, for example the vast amount of Eurodollars and Federal Reserve notes  that are abroad they are needed for a trade & investment, not to mention the confidence the world has in the Federal Reserve note makes liquidity a prerequisite of being “good”.

Secondly, Adjustment is something a good IMS has to have, basically being flexible enough to adjust to market behaviors on the fly and still maintain its confidence as a stable unit of value.

In conclusion, a good IMS must have the confidence of the issuing country as well as the world. In a flight to quality situation the world finds its safe haven in the greenback, the only exception is when the US economy looks weak then gold is the ultimate flight to quality and safety which I personally don’t see the logic in but this is the way it is…

Reference:

Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.)

Forum #8

The criteria for a "good" international monetary system can be derived from some of the events over time that have occurred in different areas of the world.  First, a good monetary system is one that has a stable backing, like gold, low-risk bonds or diversified investments.  A flexible exchange rate system is also preferable over a fixed rate exchange, as the fluctuations are market driven rather than politically driven.  Market driven fluctuations will always correct themselves accurately, where fixed rate systems are driven by political forces.

 In Mexico this was heavily evident with the fall of the peso in the 1990's.  The outgoing administration in 1994 had not been truthful in reporting the actual economic conditions which made the peso worth less than it actually was.  When corrected, it caused a major stir in the international money markets due the high level of investment in Mexico.  The takeaways from this experience in terms of having a "good" monetary system are that ""transparency always helps prevent financial crises" and that "it is essential to have a multinational safety net in place to safeguard the world financial system". (Eun & Resnick, 2015)  The Mexican government not being forthcoming on reporting on the state of its economy was very damaging and much could have been prevented if they were transparent from the beginning.  A flexible exchange system would have also prevented this from happening.  Additionally, "in hindsight, the country should have saved more domestically and depended more on long-term rather than short-term foreign capital investments". (Eun and Resnick, 2015) 

Too much dependency on FDI and not enough focus on building one's own infrastructure and business leads to an imbalance that can magnify currency problems as investors pull out.  In Asia, the currency crisis of 1997 showed some of the same philosophy with underdevelopment of one's own economy and the need to have a free market.  According to Eun & Resnick (2015), ""liberalization of financial markets when combined with a weak, underdeveloped domestic financial system tends to create an environment susceptible to currency and financial crises."

Although not perfect, a flexible exchange rate system determined by market forces has proven to be a more accurate and transparent exchange rate system.  "As long as the exchange rate is allowed to be determined according to market forces, external balance will be achieved automatically. Consequently, the government does not have to take policy actions to correct the balance-of-payments disequilibrium." (Eun & Resnick, 2015)  

Reference:

Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.). New York: McGraw-Hill Irwin. ISBN: 9780077861605