Bond Market is a mechanism where buyers and vendors of Financial Securities trade a financial say of property on the amount of money given to another person for a specified period of time at a specific rate of interest. Bonds will be the economic indicators for determining interest over the loan obtained by private firms and govt.
Interest Rate is the cost of borrowing or the price paid for rentals of money or the price for not using his own money. Interest rates vary with the time of loan. For permanent loan, it is leaner. For medium term loan, it is almost average but for short term loan, most commonly it is greater than average. Interest levels derive the current economic climate by increasing or lowering the money source in the financial market segments.
Demand for Money Interest Rate Supply for Money
When the central lender wants to control inflation by lowering money supply in the economy, it increases interest which results in low demand for the money. But this factor triggers low investment, therefore people become unemployed and countrywide output falls.
On the other hand, when central lender wants to boost up monetary and business activities in the united states, it allow commercial banking institutions to advances lending options at low interest, consequently way to obtain profit the economy rises. At this time people have much more investment opportunities but they haven't any or low personal savings. With falling interest rate and more way to obtain money consumers rush towards the intake of money on different products and services which in turn causes standard price level to raise hence inflation raises with the decrease in interest rates.
Stock Market is a market place where Shares (Common Stock, a show of ownership in the organizations earning and belongings as a security for the money provided by specific investor to the company) of different companies are traded. Prices are quoted in the market demand and offer of shares of a particular company. Higher show price suggests that the affairs of corporate are being conducted in accordance with the rules, insurance policies and commitment which the directors assure to every individual shareholder.
FEM is that market place where currencies from one country (say PKR) to another country (say US$) are bought and sold. FOREX has strong effect on the financial position of any country. When 1US$ = 52 PKR, Pakistan have less exports abroad because Pakistani products are costly for international importers as compared to when 1US$ = 86 PKR as they get less Pak- rupees against one US buck. Alternatively, when 1 US$ = 52 PKR, Pakistan have significantly more imports from other countries because Pakistani importers need to pay less Pak-rupees to get us dollars as compared to when 1 US$ = 86 PKR.
2) Why Study Banking and Financial Institutions?
Finance means the management of Money and cash. Companies need such cash for long term investments and then for running their day to day operations. Individual households save and indirectly lend their savings to such corporations. Banks, INSURANCE FIRMS, Mutual Cash, Investment Banks, Saving Banks and fund lenders are financial intermediaries, who will take deposits of homes and give it to the businesses and consumers. Resistant to the savings of homeowners, it gives interest at lower rates to homes but charge higher rate from companies or consumers for the loan directed at them. The difference between both of these rates is the earnings of financial intermediaries.
Banks are finance institutions that accept deposits and make loans. Bankers include Central bank or investment company, Commercial banking institutions, Investment banks, financing banks, Saving banking institutions, loan organizations, credit associations, common funds, pension cash, insurance firms and other such like institutions who act as an intermediaries between those who give and who acquire. Up against the loan or loaning, banks take collaterals and fill up other legal documents as a guarantee to get their money back. Normally lenders provide consumer lending options as well as industrial but consumer funds bear more interest than industrial because they are non-productive in nature.
Innovation means improvement in the old systems or techniques. Today banks are innovating with different financial instruments and options which focus on the Information Technology to E-Finance. In old ages, people withdraw money by filling a cheque but today by ATM. Account balance can be inspected at home PC. Consumer finance including Car, house, matrimony and other facilities are part of the advancement. Foreign Trade through L/C or TT and local trade by DD and TCs are also innovative ideas. Now banking institutions offer insurance center, running finance, collaboration, educational lending options, lockers facility and other financial service are ways to appeal to customers and making their income higher and higher.
3) Why analysis Money and Monetary Policy?
Money is anything which is generally accepted in repayment for goods or services or repayment of bills. Changes in monetary variables will be the result of change in money supply throughout the market and hence financial policy holds vital importance for the economy.
Business Circuit is the constant change in the positioning of business from Growth to decline to unhappiness to restoration and then to increase. In the period of boom, market has much more money source and higher development and aggregate outcome. Labor force is utilized and there is less rate of unemployment. With the higher rate of interest, money supply show up and now national output and production boils down which results in the higher rate of unemployment in the time of declining economy. When economy is at its depression stage, unemployment rate is very high with highest rate of interest which results in low money resource and bottom level of national production. Finally when market reaches the stage of restoration, money supply increases with the increase in production and productivity, which results in the reduced unemployment rate. This cycle repeat it over and over.
Money and Inflation
Inflation is the constant rise in the costs of goods and services throughout the market. The common price of goods and services throughout the market is called aggregate price level or price level. Such upsurge in the purchase price level affects the individuals, businesses and govt. Most possible reason behind this inflation is the increase in the money source in the economy which heightens buying electric power and consumption pattern of individuals. When many people dash to buy a specific goods or services, its price rises and hence it results increase in inflation throughout the market. Price level and Money resource generally move near to each other. Method for calculating inflation is the rate of change in the purchase price level relative to a base calendar years price, what we should study in index number calculation. Countries having higher inflation rate must have more impressive range of money source and vice versa. Milton Friedman says, Inflation is actually and all over the place a monetary phenomenon.
Interest rate on the bonds and loans fluctuates with the change in money source throughout the market. With more supply of money in the economy, there will be low interest and with less overall supply, market bears high interest rates. So, interest and money supply are two critical indicators of monetary insurance plan of any economy.
Central bank of the economy like SBP regulates the amount of money supply and interest to formulate an acceptable and growth driven monetary plan so that all economic parameters show their favorable movement for overall economy growth and prosperity.
Monetary plan is the way to obtain money in the economy to control inflation, national outcome and other financial variables while Fiscal insurance policy is your choice of govt. regarding its earnings (fees) and expenditures (development expenditures). Budget deficit is the increase in govt. expenditures over its revenues. Budget surplus is the upsurge in govt. revenue over its expenses. In the period of budget deficit, govt. needs developmental lending options from Central standard bank, financial intermediaries, IMF, World Lender, Assian Development Bank and other financial institutions to meet their financial needs. Budget deficit also brings about the upsurge in money supply and therefore interest rate increases. Surplus or deficit is normally measured as a percentage of GDP or aggregate productivity of the market.
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