In the , 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 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. 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).” ). 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. 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.)
Last Completed Projects
| topic title | academic level | Writer | delivered |
|---|