Interest Rates: History And Overview
One may think of 'interest rates' as merely a concern of cutting edge modern economic news. Indeed, the rate of interest has been the obsession of the business media of recent weeks. One March 21, 2005 Business eek article proclaimed, "Pop! Goes the Auto Bubble -- with oil prices and interest rates rising! (Mandel, 2005) But in actual fact interest rates are simply the percent at which an individual is charged for borrowing money, either from a bank, a human being, or another entity such as a credit card company. Interest rates are an old institution -- once, the rate of interest was called 'usury' and banned by the church. Now charging a reasonable rate of interest for borrowing money is considered a necessary fact of modern life, particularly for large, durable goods such as cars, houses, and appliances.

Unsurprisingly, the lesser the rate of interest, that…...

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Works Cited

Mandel, Michael (21 Mar 2005) "Pop! Goes the Auto Bubble -- with oil prices and interest rates rising!" Business Week. Retrieved 28 Apr 2005 at  http://www.businessweek.com/bwdaily/dnflash/mar2005/nf20050321_4309_db084.htm

Public choice theorists focus on the question of what government policies are likely to be implemented in a given political setting, rather than what policies would produce a desirable outcome if they were implemented. The conclusions of the public choice theory tend to increase skepticism towards the prospect that giving government power over various areas of human affairs will actually have beneficial results, regardless of the democratic control exercised by the citizens.

One of the basic insights that underlie the public choice theory is that good government policies in a democracy are an underprovided public good, because of the rational ignorance of the voters. Each voter is faced with an infinitesimally small probability that his vote will change the result of the elections, while gathering the relevant information necessary for a well-informed voting decision requires substantial time and effort. Therefore, the rational decision for each voter is to be generally ignorant…...

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Because the government uses the tax code as an instrument of social policy, the code as a whole appears to lack a coherent organizing principle. This lack of a coherent organizing principle has become magnified over time, due to the interplay between successive legislative amendments and regulatory changes to the law and the private sector responses to those amendments and changes. For instance, suppose that Congress enacts a tax credit to encourage a particular type of activity. In response, a group of taxpayers who are not the intended beneficiaries of the credit re-order their affairs, or the superficial aspects of their affairs, to qualify for the credit. Congress responds by amending the code to add restrictions and target the credit more effectively. Certain taxpayers manage to use this change to claim additional benefits, so Congress acts again, and so on. The result is a feedback loop of enactment and response, which, over an extended period of time, produces significant complexity.

The U.S. government rewards certain behavior with tax deductions or tax credits. The most famous reduction in taxes is that income used to pay mortgage interest on a personal home is exempted from taxes, if the taxpayer elects to itemize. Taxpayers who do not participate in an employer-sponsored pension plan may contribute up to $3,000 ($3,500 if age 50 or above) into an individual retirement account, and deduct that contribution from their gross income. The Earned Income Tax Credit benefits low- to moderate-income working families.

In general, the U.S. income tax is highly progressive, at least with respect to individuals that earn wage income. As of 2001, the top one percent of individual taxpayers paid approximately 23% of all federal taxes. The top five percent paid approximately 39%, and the top 10% paid 50% of all federal taxes. The bottom 20% of taxpayers paid a little over one percent of all federal taxes. Moreover, the progressivity of the U.S. tax system has gradually increased over recent decades. The top 20% of taxpayers paid approximately 56% of all taxes in 1980, and this figure gradually has risen to 65%, as of 2001. In recent years, however, a reduction in the tax rates applicable to capital gains has significantly reduced the income tax burden on non-wage income. In this regard, the general structure of the U.S. tax system has begun to resemble a partial consumption-tax regime.

NPV

This becomes more complicated when trying to determine the changes that would occur to the net present value of today's dollars, especially given the uncertainties involved with changes in the interest rate. On the one hand, the value of future dollars (i.e. today's dollars saved) is eroded by inflation, so a lower interest rate is detrimental to NPV; on the other hand, higher interest rates mean more lucrative lending and higher returns on many investment, which would mean a dollar invested today would be worth more in the future (Investopedia 2011). At the same time, higher interest rates could slow the pace of business and damage gains in the stock market, leading to diminished returns (Magnuson 2008). The effect of interest rates on the NPV, then, depends on other macroeconomic and financial effects.

WACC

The Weighted Average Cost of Capital would basically increase due to a change in interest rates, but more…...

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References

CSS. (2002). Value of Annuities. Accessed 27 February 2011.  http://www.getobjects.com/Components/Finance/TVM/pva.html 

Investopedia. (2011). Accessed 27 February 2011.  http://www.investopedia.com/ 

Magnuson, J. (2008). Mindful economics: how the U.S. economy works, why it matters, and how it. New York: Macmillan.

MC. (2011). Mortgage calculator. Accessed 27 February 2011.  http://www.mortgage-calc.com/mortgage/simple_results.html

Interest Rate Swaps
The assertion that interest rate swaps require markets to be inefficient is inaccurate. hile swap markets benefit from some inefficiency, firms may have compelling non-financial reasons for wanting to make changes to the timing of their cash flows, which is the basis for firms undertaking swaps. For these end users of swaps, the swap is most beneficial at fair value, and that is the price at which the swap will typically be set. The counterparties are expected to agree on the expected future direction of the floating component of the swap, meaning that swaps depend more on efficient markets than inefficient markets -- the latter makes it more difficult for the counterparties to agree on fair value.

Interest rate swaps are contractual arrangements between two parties, where they agree to exchange payments based on a principal amount, for a fixed period of time (CDIAC, 2007). The most common type…...

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Works Cited:

CDIAC. (2007). Understanding interest rate swap math & pricing. California Debt and Investment Advisory Commission. Retrieved December 6, 2011 from www.treasurer.ca.gov/cdiac/publications/math.pdf

Stern (1999). Interest rate swaps. Stern School of Business. Retrieved December 6, 2011 from pages.stern.nyu.edu/~eelton/debt_inst_class/Swap.pdf

Interest Rates and Pension Plans
The strength of private retirement plans must be maintained in the upcoming years due to the increasing number of Baby Boomers who will be retiring in the United States. Many retired Americans rely on private pensions and employer-sponsored retirement savings as a secondary source of income in addition to Social Security (Brinner 131). In addition, because the human life expectancy has increased dramatically over recent years, it is very important that policymakers encourage the growth of employer-sponsored retirement plans (Hungerford et al. 13).

Defined benefit plans are employer-provided retirement plans that provide a guaranteed retirement income (Blomquist and ijkander 32). The employer typically assumes all of the investment risk and the benefits are guaranteed by the Pension Benefit Guaranty Corporation. In the United States alone, there are approximately 50,000 defined benefit plans that cover about 23 million workers (Hungerford et al. 16)

History of Discount Rates

Over the years,…...

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Works Cited

Blomquist, N.S., and H. Wijkander. "Fertility Waves, Aggregate Savings and the Rate of Interest." J. Popul Econ 7.1 (1994): 27-48.

Brinner, R.E. "U.S. Outlook Issues: Putting America's House in Order." Acad Med 64.3 (1989): 131-4.

Hungerford, T., et al. "Trends in the Economic Status of the Elderly, 1976-2000." Soc Secur Bull 64.3 (2001): 12-22.

In the article, they surveyed 69 different countries, searching for answers on what affects FDI. Where, they found that interest rates will affect FDI flow: as the cost of financing, purchasing new equipment and the strength or weakness of the economy will play an important part. In the case of Australia, this is significant because the low interest rates that they have had in place since the 1980's, have helped contribute to this capital inflow. This is an interesting point, because the interest rates were lower in Australia than China. As a result, because of the lower interest rates, Australia attracted the largest amounts of FDI.
Clearly, interest rates play a major role in determining the overall flow of investment capital. This is because higher or lower rates will affect everything from the cost of purchasing equipment to consumer activity. As a result, the level of interest rates will have…...

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Bibliography

Australia's FDI Stock up 20% to U.S. $246 Billion. (2006, July 11). Retrieved March 16, 2010 from Australian

Consulate General website:  http://www.guangzhou.china.embassy.gov.au/gzho/MediaEN35.html 

Lee, J. (1998). How Does Foreign Direct Investment affect Economic Growth. Journal of International Economics,

45(1), 115 -- 135.

Economics
Mexico; How Interest ates Can Be Used to Manage an Economy

The management of the economy, undertaken with strategies from the government and decision fro the central bank, is usually undertaken with the aim of promoting and supporting a stable economy, balancing the desire for sustainable growth with the need to constrain inflation. This is an issue faced by almost all countries; inflation can be harmful to an economy, impacting not only in the internal stakeholders, but influencing the exchange rate. The control of inflation, often through the use of interest rates, may also help to stifle growth. This can be a conundrum, as stimulating growth and constraining inflation requires a very careful balance of economic policies. Mexico has been faced with this issue and in March 2013 the Banco de Mexico

made a surprise decision to reduce their interest rates from 4.5% to 4% (Trading Economics, 2013), and then hold the…...

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References

CIA, (2013), Mexico, [online] accessed 29th April 2013 from  https://www.cia.gov/library/publications/the-world-factbook/geos/mx.html 

Howells P.G.A, Bain, K, (2007), Financial Institutions and Markets, London, Longman

Hughes, E; O'Boyle M, (2013, April 27), Mexico Holds Interest Rates, Watches Capital Inflows, The Globe and Mail, [online] accessed 30 April 2013 from  http://www.theglobeandmail.com/report-on-business/international-business/latin-american-business/mexico-holds-interest-rates-watches-capital-inflows/article11575099/ 

Index Mundi, (2013), United Kingdom GDP, [online] accessed 30th April 2013 from  http://www.indexmundi.com/united_kingdom/gdp_real_growth_rate.html

educing operational costs is thus a key element in making microcredit less usurious. Extending larger loans to a group of individuals, so the cost of the loan is dispersed to a community, rather than used to burden a single individual is another potential solution.
The charges of usury are also rooted in the highly variable rates of interest around the world of microfinance, which can create the perception of injustice. Furthermore, some loan rates are shocking, especially for loans extended by supposedly charitable institutions and programs: "in 2007, for example, a controversy erupted around Compartamos, a Mexican MFI that was earning a 55% return on shareholders' equity by charging its borrowers interest rates around 85%" (Are microcredit interest rates excessive, 2009, CGAP). On average, the median interest rate for profitable microfinance institutions (MFI)s was about 26% in 2006. While this is around the interest rate of some credit cards in…...

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References

About microfinance. (2009). Kiva. Retrieved November 20, 2009 at  http://www.kiva.org/about/microfinance#1._What_is_microfinance 

Are microcredit interest rates excessive? (2009, February 25). CGAP. Retrieved November 20,

2009 at  http://www.cgap.org/p/site/c/template.rc/1.26.5302/

Interest rates form the basis for valuation models around the world. They are used in almost every industry, country, and geography. Interest rates can also influence corporate and consumer behaviors. For example, depending on the inherent risk of a consumer, credit card rates determine how much an individual must pay on a month basis to the financial institution. Corporations looking to borrow funds to expand their market share must consider the variable interest rates being changed and their ability to service the debt. Even governments must be mindful of the extent of their borrowers and the corresponding impact of interest rates on their ability to services the debt. Due primarily to their importance in key elements of human civilization, interest rates are a closely watched tool by individual investors, general consumers, and corporations. Banks in particular are heavily influenced by the change in interest rates as they operate as financial…...

Banking and Spreads: How Commercial Banks Utilize Spreads to Maintain Profitability
Commercial banks are institutions that provide services to their customers, including accepting deposits, cashing checks, lending money for various purposes, and providing investment products. Commercial banks are for-profit institutions, and while they rely on various sources of profit, including fees, their main source of profit is the interest rate spread (Investopedia, 2016). Interest rate spread refers to the difference between the interest rate charged by banks on loans to the private sector and the interest rate paid on various savings accounts. A simple numerical equation to describe the interest rate spread is Spread = Interest charged -- Interest paid. The interest rate paid by the bank is lower than the amount it charges to customers who have loans, and the difference between these two rates is how commercial banks derive the bulk of their income.

While a bank may derive the…...

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References

Investopedia. (2016). How do commercial banks make money? Retrieved February 8, 2016

from:  http://www.investopedia.com/ ask/answers/040215/how-do-commercial-banks-make-money.asp

Were, M. & Wambua, J. (2014, December). What factors drive interest rate spread of commercial banks? Empirical evidence from Kenya. Review of Development Finance, 4(2), 73-82.

Vasicek model is a model used in finance that depicts the development, movement or evolution of interest rates. The model is based on one single factor or source of market risk but it is useful in evaluating the pricing of derivatives or interest rates. Developed in 1977 by Oldrich Vasicek, the model also has a function in stochastic charting (Vasicek, 1977). Vasicek himself characterized it as an equilibrium within the term structure.
The formula for the model is and shows that stochastic differential equation gives place to the instant interest rate. It is the parameter of the standard deviation that allows for volatility to be determined (James, Webber, 2000).

Vasicek (1977) notes that a number of assumptions are at play in this formula -- such as the idea that spot interest "follows a diffusion process" and that it is on the spot rate that "discount bond" prices are dependent; the final assumption…...

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References

Copeland, Weston, Shastri. (2005). Financial Theory and Corporate Policy. NY:

Pearson.

Hull, J., White, A. (1996). Using Hull-White interest rate trees. Journal of Derivatives,

3(3): 26-36.

Part 1: The US Dollar There are several advantages for a nation to have its own currency. The biggest advantage is probably that having one's own currency allows a nation to print more money, which can help it to avoid debt default (Wood, 2011). This is tied to other issues of sovereignty, and especially fiscal and monetary sovereignty, where a nation can manage the value of its currency and use the currency as a means of influencing trade, and by extension the nation's economy (Wood, 2011).
In Europe, where most nations are on the Euro, the fact that these advantages do not exist became a critical issue during the recession of 2008-2009. Several smaller Eurozone nations faced high debt loads, but were unable to do anything about those debt loads. The reason is that the Eurozone economy as a whole is driven primarily by three large industrial nations – Germany, France and…...

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References

Da Costa, P. (2017) Fed official: It\\'s inevitable that a controversial policy will return in the next recession. Business Insider. Retrieved September 16, 2017 from  http://www.businessinsider.com/fed-official-qe-is-inevitable-when-the-next-recession-hits-2017-5 

Krugman, P. (2011) The economic failure of the Euro. NPR. Retrieved September 16, 2017 from  http://www.npr.org/templates/transcript/transcript.php?storyId=133112932 

Ruan, H. (2013) Impact of US quantitative easing policy on Chinese inflation. University of Victoria. Retrieved September 16, 2017 from  https://www.uvic.ca/socialsciences/economics/assets/docs/honours/Ruan_Ryan.pdf 

Seth, S. (2015). What are the advantages of not adopting the Euro? Investopedia. Retrieved September 16, 2017 from  http://www.investopedia.com/ articles/investing/043015/what-are-advantages-not-adopting-euro.asp

Defense of the Fed's New Interest-ate Policy, which was published by The Wall Street Journal on January 6th, 2013, financial reporters Frederic S. Mishkin and Michael Woodford carefully craft a justification of the Federal eserve's latest revision to its federal-funds rate target. The purpose of the article is to inform readers about the Fed's recent Federal Open Market Committee (FOMC), which resulted in the decision to keep the federal-funds rate near zero with a contingency based on the national unemployment and inflation rates. By linking the federal-funds rate target to a baseline of 6.5% unemployment, and a predicted rate of 2.5% inflation, while also providing public notice regarding its previously private policy criteria, the Fed is renewing its efforts to stabilize an economy battered by a prolonged recession. As Mishkin and Woodford state in the article, this "commitment not to raise rates in the future as soon as might…...

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References

Mishkin, F.S., & Woodford, M. (2013, January 06). In defense of the fed's new interest-rate policy. The Wall Street Journal. Retrieved from  http://online.wsj.com/article/SB10001424127887324274404578211832381399400.html 

Yoon, A. (2013, January 28). Private mortgage market gains momentum after the crisis. The Wall Street Journal. Retrieved from   711413.htmlhttp://online.wsj.com/article/BT-CO-20130128 -

China announced on Oct. 28, 2004 the first interest rate rise in nine years. In this manner, Beijing is showing its willingness to adopt additional market-oriented reforms in order to have a tighter macro-economic control on the already overheated economy. Although the news regarding the evolution of the Chinese interest rate were contradictory, it would appear that North American economists are welcoming this interest rate increase.
The Chinese economy is rapidly becoming one of the most important in the world, with an annual 8% growth-rate, constant expansion in the preceding years and a history of twenty years of economic reforms. The global economy and especially neighboring countries such Taiwan and Hong Kong are feeling the pressure of the Chinese machine. Investors have made public their fears, since April 2004, that the economy will overheat and are now expecting the austerity measures by the Government to slow the growth and provide for…...

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References:

. "China economy: Beijing considers rate rise to cool economy";

EIU ViewsWire. New York: Apr 20, 2004. pg. n/a (c) 2004 The Economist Intelligence Unit Ltd.,Source: Financial Times

2. "Chinese interest rise shakes international market";

The English version of the Chinese People's Daily Online

In the contemporary financial environment, individuals who deposit money in the banks earn interest from their deposits. Similarly, commercial banks also receive interests from lodging funds with central banks. In other words, banks compensate savers by adding some percentages of the amount saved in the banks. In a sense, savers are lending their money to banks in order to be used elsewhere. In return, banks compensate savers interest incomes. Meanwhile, the interest rates are quoted as APY (annual percentage of yield) and savings account earns 3% APY. However, negative interest rates reverse this arrangement where savers or depositors are obliged to pay banks for holding their money. Moreover, central banks penalize commercial banks for depositing their funds with them. For example, The ECB (European Central Bank), some smaller European banks, and Bank of Japan have introduced the negative interest rate policy where banks, as well as other financial institutions, will…...

The money multiplier is a ratio between central bank and commercial bank money and looks at how much commercial bank money can be created with a unit of central bank money. The monetary authorities can influence the supply of money by printing more, but that leads to devaluing of the currency. It is also possible to lower interest rates and make other changes that will lead to an adjustment of the ratio, thus increasing the supply of money and helping the economy. For an essay on this topic, it would be possible to focus on a specific way the economy....

1. The Role of Internal Capital Markets in Enhancing Organizational Efficiency:

- Explore how internal capital markets facilitate efficient allocation of financial resources within a corporation.
- Discuss the mechanisms through which internal capital markets promote investment decisions based on economic rationale rather than political or personal considerations.
- Analyze the impact of internal capital markets on reducing bureaucratic inefficiencies and improving overall organizational performance.

2. Comparison of Internal Capital Markets with External Capital Markets:

- Identify the key differences between internal and external capital markets in terms of access to funds, cost of capital, and risk exposure.
- Evaluate the....

1. The impact of supply and demand on interest rates in HSBC Bank
2. The role of elasticity in determining pricing strategies in HSBC Bank
3. The concept of opportunity cost in investment decisions at HSBC Bank
4. The influence of market structure on competition and pricing in HSBC Bank
5. The effects of government regulation on the banking industry and HSBC Bank specifically
6. The relationship between marginal utility and consumer behavior in the banking sector, with a focus on HSBC Bank
7. The concept of economies of scale and how it applies to HSBC Bank's operations and growth strategies
8. The principles of cost-benefit analysis....

Microeconomic Analysis of HSBC Bank

Introduction

HSBC Bank is a global banking and financial services corporation headquartered in London, England. As one of the largest banks in the world, it operates in over 60 countries and territories, offering a wide range of financial products and services to individuals, businesses, and governments. This essay will focus on microeconomic concepts that can be applied to analyze HSBC Bank, with specific examples and insights.

Market Structure

One important microeconomic concept to consider is market structure. HSBC Bank operates in a highly competitive global banking industry. It faces competition from numerous other large banks, as well as smaller....