When a lender imparts funds for an investment, their primary aspiration is to have the money recouped
Response 1.)Carter
When a lender imparts funds for an investment, their primary aspiration is to have the money recouped (Kates, 2011). However, lending money is associated with a miscellany of risks (Kates, 2011). One risk associated with the purchase of bonds is the risk of the issuer defaulting (Mishkin, 2018). According to Mishkin (2018, p. 117), \”Default occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures.\”.
The risk of default for a particular bond affects that bond\’s interest rate (Mishkin, 2018). Usually, bonds with a higher risk of default have higher interest rates, and bonds with lower default risk have lower interest rates (Mishkin, 2018). Some bonds, such as U.S. Treasury bonds, are considered default-free (Mishkin, 2018). This means that the bonds have virtually no risk of default (Mishkin, 2018). The risk premium is the difference between the interests rates of default-free bonds and the interest rates of bonds that have some risk of default (the bonds would also need to have the same maturity) (Mishkin, 2018).
According to Mishkin (2018), if a bond\’s risk of default increases, the risk premium will also increase. Credit-rating agencies evaluate bonds related to the probability of default (Mishkin, 2018). Moody\’s is a credit-rating agency (Mishkin, 2018). Moody\’s Baa ratings are considered lower medium grade with respect to default (Mishkin, 2018). Moody\’s C rating is regarded as a high risk of default or may already be in default (Mishkin, 2018). Given that the risk premium increases with the risk of default, the higher risk premium would be the bond with the C rating.
Kates, S. (2011). Free market economics: An introduction for the general reader. Edward Elgar Publishing.
Mishkin, F. S. (2018). Economics of money, banking and financial markets, the, business school edition (5th ed.). Pearson.
Response 2.) Michael
Bond interest rates are higher or lower depending on the quality of the bond (Mishkin, 2019). The safest bonds are U.S. Treasury bonds since they are expected to have no default risk. Corporate bonds have default risks and rating agencies like Moody’s and Fitch set relative rates for corporations to indicate default risk. When corporations issue bonds to raise funds, the rating impacts the interest rate associated with the bonds.
Corporate bonds with greater default risk have higher interest rates (Mishkin, 2019). The difference in interest rates between the lower risk bonds and the higher risk bonds is the risk premium. The risk premium indicates how much more interest the investor expects from the lower quality bond in comparison to higher quality bonds. A corporate bond with a Moody’s Baa rating has a lower risk premium than a corporate bond with a C rating because the Baa rating is a higher quality bond than a C rated bond.
Mishkin, F. S. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson.
Response 3.) Deborah
Asset Valuation is the process of determining the fair market value. Asset valuation play a key role in finance and consists of subjective and objective measurements (Investopedia). The cost of any expense is found by computing the value today of all cash flows the investment will make. This is called present value. Present value is the current value of a future sum of money or stream of cash flows given a specified rate of return (Investopedia). Basically, present value demonstrate that money acquired in the future is not worth as much as an equal amount received.
Response 4.)Kimberly
Valuation is the process of determining the fair value of a financial asset. The fundamental basic principle of finance that can be applied to the valuation of any investment asset is the present value. “One basic principle of finance is that the value of any investment is calculated by computing the present value of all cash flows the investment will generate over its life” (Mishkin.2019). Understanding how money flows and what the final sum of cash flow one gets will be very useful in the business industry and beyond.
References
Mishkin, F. (2019). The economics of money, banking, and financial markets (5th ed.).
Response 5.)Jayne
The relationship between corruption and living standards at the country level is channeled from political influences (government), big tech, adverse selection, moral hazard, and asymmetric information. In a democracy, the voters elect official whom they trust; therefore, when that official use their platform for (corrupt) self-interest and favoritism toward a select group, it causes distrust of government. Big Tech and millionaires evade taxes by channeling money to foreign banks. Until recently, lawmakers hid the influence that lobbyists and their sponsors had on the land law, similar to asymmetric information.
Response 6.) Mary
You could almost expect that corruption measures can or will negatively correlate with living standards. Corruption usually deters investment, since it undermines the legal system. Countries in which corruption is more prevalent have trouble encouraging individuals or companies to invest in them because of the risk associated with the investment. Corruption affects living standards by undermining the efficiency of the legal system, thereby lowering investment, one fundamental ingredient to economic growth, the basis of higher living standards. Consumers must realize that the cost of theft oftentimes is reflected on to the consumer at higher prices. Galatians 6:8 \”For the one who sows to his own flesh will from the flesh reap corruption, but the one who sows to the Spirit will from the Spirit reap eternal life\”.
Response 7.)Leslie
Deposit insurance is designed to decrease fears of bank runs and increase confidence in banks and deposits. Developing countries will face a significant problem when implementing an insurance system like the U.S. Firstly, replicating a financial plan that a given government adopts to another country may not fit the economy due to the disparities in history, politics, and economies. The deposit insurance is designed to increase confidence in the banking system. Moreover, having confidence will force the depositors to neglect to supervise the banks, increasing the moral hazard through asymmetric information.
Response 8.)Lauren
“Like any other insurance policy, it is a protection cover against losses accruing to bank deposits if a bank fails financially and has no
money to pay its depositors and has to go in for liquidation,” said The Economic Times. If the developing country does not have the same
policies and rules as the United States, implementing a system of deposit insurance similar to the system that exists in the United States
may not be a good idea. The United States deposit insurance was created from a precedence of events that our country has had to
overcome. This could create more problems than solutions in the financial system of a developing country if they do not have the same
technology as the United States has. Technology plays a huge role in the deposit insurance, especially when you are providing a service
for man people.
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