Abstract The paper shows that bank interestrates have been steadily decreasing since the September 11th attack on America and that the attack caused the business failures of major corporations, such as World Com and Enron. It discusses that one of the areas that are going stronger then ever is the real estate industry and many homeowners are taking the option to refinance their homes. The paper shows that banks and financial institutions are not in favor of this procedure as a homeowner who refinances his house may lower his monthly payments several hundred dollars - banks are making significantly less money on the lowered monthly payments through refinances. The purpose of the essay is to discuss how the lowered interestrates are affecting the housing industry.
From the Paper "House sales are running a record high this year, according to Reaser, chief economist of Bank of America. The refinancing of mortgages is supporting a major portion of the economy that is surviving and thriving. At the present time, refinancing is showing no signs of slowing down; in fact it is steadily increasing. People are putting the extra money into home improvements and buying new cars, another low interest financing option."
Abstract yThis paper discusses indepth the state of the economy in context of the rise and then consistent drop in interestrates over the last 5 years. It discusses what the impact is such rate cuts is on all aspects of the economy and also highlights the various kinds of interestrates.
Table of Contents
Introduction
Overview of InterestRates and their Significance as a Macroeconomic Tool
Types of InterestRates Impact of Change in InterestRates on the Current Economy
Conclusion
References
From the Paper "The Federal Reserve like other Central Banks seeks to maintain a financial environment within which competitive markets support the efficient use of productive resources. The overarching principle is that central bank should provide the necessary monetary and fiscal stability in a way that leaves the maximum freedom of action to private markets. In keeping with this principle, monetary policy is implemented by indirect means, with an interest rate policy instrument than with direct credit controls. Thus interest rates are part of the Federal Reserve's key macroeconomic tools that it has at its disposal to control the markets? and inadvertently the entire economies money supply. The quantity of money within an economy can determine various exogenous and endogenous factors that can keep the markets and the economy in close range of the equilibrium position. This is important in-order to prevent the extensive number of boom and bust cycles the American economy has faced in the early part of the last century."
Abstract This paper explains that the Federal Reserve Bank (the Fed) was established in 1913 in response to serious economic instability in the United States because, at that time, bankers had few guidelines to asset reserves and loan policies; therefore, some communities were virtually controlled by private trusts. The author points out that the Federal Reserve Act, which divided the nation into twelve districts with twelve Federal Reserve banks, standardized banking in the U.S. (1) by requiring every bank in the country to deposit part of its money at its regional Federal Reserve Bank in order to guarantee liquidity, (2) which the Fed invests to earn interest; furthermore; (3) these regional Federal Reserve Banks are not governmental organizations but rather privately owned financial institutions owned by member banks with (4) a seven member Federal Reserve Board, appointed by the President, to oversee the system and to establish policy. The paper stresses that the greatest power given to the new Federal Reserve System was the power to slow or stimulate the economy by raising or lowering the new discountedinterestrate.
From the Paper "Despite the fact that the Panic of 1907 and the country's long history of bank panics and bank instability had shifted public opinion toward national economic reform, the American monetary system went unchanged for another five years. In the meantime, the lack of currency in circulation was creating a credit crunch in the United States. Then in 1912, congress passed the Aldrich-Vreeland Act to provide short-term aid by allowing national banks to issue notes on a wider range of securities, thus putting more money into circulation. As a more long-term solution, congress created a National Monetary commission to find ways in which to stabilize the American monetary system."
Abstract This paper explains that the goal of its thesis is to conceive a model to manage the global interestrate risk of the commercial portfolio in order to determine the optimal structure of the new production and to test the tool on the Credit Foncier de Monaco, private banking and subsidiary of Calyon, which is obviously the investment banking of Credit Agricole. The paper's thesis is divided into two main sections: the theoretical modeling and the empirical application.
Table of Contents:
Abstract
Abbreviations
Introduction
Theoretical Modeling
Identification
InterestRate Nominal vs. Real Rate Fixed vs. Variable InterestRate Short-Term vs Long-Term Rates Spot vs. Forward Rates Term Structure of Interests Theories
Methods
Deterministic and Stochastic Models
Sources of InterestRate Risk
Repricing or Maturity Mismatch Risk
Basis or Bid-Ask Spread Risk
Yield Curve Risk
Options Risk
InterestRate Exposure
Net and Gross Positions
Balance-Sheet & Gap
Profit and Loss Statement and Spread
Factors
Measurement
Volume
Instantaneous Gaps
Generalized Gaps
Indexed Gaps
Simulated Gaps
Value
Duration
Convexity
Market
Margin
Sensitivity
Modified Duration and Relative Convexity
Money Markets Rates Management
Hedging And Speculation
Micro or Macro Hedging
Systematic or Selective Hedging
Partial and Total Speculation
Hedging Risk and Opportunity Cost
Passive and Active Hedging
Passive Hedging or Beta Management
Active Hedging or Alpha Management
Instruments
Spot
Forward And Future
Fra And Swaps
Options
Modeling
Utility
Structure
Utility Function
Constraints
Regulation
Commercial
Model
Objective Function
Efficient Portfolio
Optimal Portfolio
Empirical Application
Presentation
Cfm
Treasury
Asset-Liability Management (Alm) Committee
Adaptation
Structure
Constraints
Rates Simulation
Leverage
Regulatory Constraints
Variance-Covariance Matrix
Utility
Variances
Conclusion
Glossary
Appendix: Balance-Sheet + Profit & Loss Statement
Appendix: Balance-Sheets by Currency, Maturity and InterestRate Appendix: Gaps
Appendix: Correlation and Variance-Covariance Matrix
Appendix: Weightings and Balance-Sheets in March 2008
Appendix: Coefficients of Variation
Appendix: Objective Function for Different Aversions to Risk
From the Paper "Taking into account the stock and constraints, the model determines the optimal allocation of the production for different scenarios of rates level, rates volatility and risk aversion degrees. The bank hedges against the interest rate risk by optimally adjusting its production.
"The optimal portfolio is the tangent point between the efficient frontier and the indifferent curve. It is obtained by equalizing the marginal rate of transformation (MRT) to the risk to return, which is the slope of the efficient frontier, and the marginal rate of substitution (MRS) to the risk to return, which is the slope of the objective function."
Tags: tool transformation, tangent point, risk premium, asset management
Abstract This paper explains that, even though transformation of deposits into loans generates a return but engenders financial risks and particularly an interestrate risk, the Basel II Committee does not provide any standardized method to manage this crucial risk. The author adapts the Markowitz portfolio selection theory on the banking, particularly on the commercial balance-sheet. This model is tested on Credit Foncier de Monaco and finds that this tool maximizes under constraints the risk-adjusted performance and determines the optimal allocation of the assets. In conclusion, the theoretical objectives are compared with the actual results. Numerous formulas are used throughout the paper and seven appendices are included.
Table of Contents:
Abbreviations
Introduction
Theoretical Modelling
Identification
InterestRate Nominal Vs. Real Rate Short-Term Vs Long-Term Rates Spot Vs. Forward Rates Term Structure Of Interests Theories
Methods
Deterministic And Stochastic Models
Sources Of InterestRate Risk
Repricing Or Maturity Mismatch Risk
Basis Or Bid-Ask Spread Risk
Yield Curve Risk
Options Risk
InterestRate Exposure
Net And Gross Positions
Balance-Sheet & Gap
Profit & Loss Statement & Spread
Factors
Measurement
Volume
Instantaneous Gaps
Generalized Gaps
Indexed Gaps
Simulated Gaps
Value
Duration
Convexity
Market
Margin
Sensitivity
Modified Duration And Relative Convexity
Money Markets Rates Management
Hedging And Speculation
Micro Or Macro Hedging
Systematic Or Selective Hedging
Partial And Total Speculation
Hedging Risk And Opportunity Cost
Passive And Active Hedging
Passive Hedging Or Beta Management
Active Hedging Or Alpha Management
Instruments
Spot
Forward And Future
Fra And Swaps
Options
Modelling
Utility
Structure
Utility Function
Constraints
Regulation 40
Commercial
Model
Objective Function
Efficient Portfolio
Optimal Portfolio
Empirical Application
Presentation
Cfm
Treasury
Asset-Liability Management (Alm) Committee
Adaptation
Structure
Constraints
Rates Simulation
Leverage
Regulatory Constraints
Variance-Covariance Matrix
Utility
Variances
Conclusion
Glossary
Appendices
Balance-sheet + Profit & Loss Statement
Balance-Sheets by Currency, Maturity and InterestRate Gaps
Correlation and Variance-Covariance Matrix
Weightings and Balance-Sheets in March 2008
Coefficient of Variations for Different Scenarios
Objective Function for Different Aversions to Risk
From the Paper "The bank uses options to hedge against the exercise of inserted options. The interest rate option is the right for the holder to borrow from (put) or lend to (call) the writer an underlying at the strike rate against a premium at each date (American option), at predetermined dates (Bermuda option) or at maturity (European option). The basis strategy of the bank is long call or short put in case of decrease of interest rates and short call and long put in case of increase of interest rates."
Abstract The paper discusses what interestrates are, who controls interestrates, how interestrates affect an economy, the conundrum of why 30-year interestrates have not increased in spite of all contrary experience, and a conclusion concerning whether interestrates should be increased at a measured or quick pace.
From the Paper "I wonder if when Nostradamus was predicting the end of the world and saw the world awash in flames, what he really saw was the world awash in debt. Presently, because interest rates in the United States are so low, Americans and American businesses have taken out loans at an increased rate to keep pace with their high demand of goods and services. The Bush administration's tax cuts have added fuel to this spending trend also. The purpose for these two actions was to jump start the United States economy; Policies that have been successful. The real GDP has continued to grow at a good pace and the fourth quarter of 2004 growth of 3.1 percent annual rate is an indication of this growth . But what are the consequences of this growth come?"
Abstract This paper discusses the recent economic reports and events with respect to interestrates and interestrate movements. The current state of the US economy is examined as well as the Federal Reserve handling of monetary and fiscal policy relative to the economy. Of particular importance is the Federal Reserve's strategic shift in policy from accommodative to appropriate. The writer concludes that it can be seen that interestrates are much more than one of many economic devices that the Fed has to influence the economy but is actually one of theprimary methods in which the Fed interacts and influences the direction of economic growth and expansion.
Outline:
Abstract
Introduction & Thesis
Overview of InterestRates Types of InterestRates Impact of Change in InterestRates Conclusion
From the Paper "Risk structure as it relates to interest rates is essentially the relationship between the interest rates on bonds that have the same term to maturity features. This leads to an active consideration of the default risk which is the chance that a given issuer of a bond may default by not being able to make the interest payments on the bonds at completion of the term or may not be able to meet the face value payment of the bond either. This creates the default risk model which implies that as the risk associated to a bond family increase then interest rates must also increase in order to compensate for the risk premium being incurred. Thus, since corporate bonds are more prone to market failure they typically bear a higher interest rate than government bonds, for example."
Abstract This paper presents an overview of how interestrates function, how the Federal Reserve manipulates interestrates as a means of exerting control of the economy and what factors affect interestrates. The paper also discusses Federal Reserve policy regarding interestrates in recent years and concludes that falling interestrates are good for both the economy and the individual.
From the Paper "In recent months, we have heard a great deal about the importance of interest rates in manipulating our sagging economy. We know that interest rates affect what we pay on our mortgages, credit cards and educational loans. It also impacts how much money we make on the money we deposit with a bank. We have also learned about the effect of interest rates in the stock market: higher interest rates discourage businesses from borrowing money, expanding and hiring new workers, which causes their stock to either stagnate or fall in value. Interest rates have been lowered by the Federal Reserve eleven times in the past year to a four-decade low of 1.75% in an effort to salvage our hurting economy."
Abstract This paper provides an overview and analysis of interestrate risk (IRR)management using the Federal Reserve Bank of San Francisco's (2004) Economic Letter. It looks at IRR management as a tool for understanding how organizations approach risk management and why risk management and interestrate is so important to a financial institution's ability to conduct business. The paper also reviews the impact of global policies and regulatory procedures on interest risk management and ascertains whether such measures are possible and whether such measures would prove beneficial for banks and other financial institutions throughout the world.
Table of Contents:
Introduction
InterestRate Risk
Mitigating InterestRate Risk
Universal Guidelines for Risk Management
Efficacy and Analysis
Conclusions
From the Paper "While there is no way to control economic upswings or downturns in many cases, banks can do much to help protect their assets and limit interest rate risk through proper management. This can be accomplished through global and regional guidelines, and even guidelines established within specific banking institutions. Oversight by a board of directors and senior management team, combined with the approval of the public, may result in greater efficiency and better universal management of risk. Most banks have the resources to adopt a policy such as this with minimal investment of time. In the interests of reducing interest rate risk, most banks should at the very least attempt the policies and procedures offered in this analysis, and assess what if any positive changes result."
Compares the covered-uncovered interestrate parity of the U.S. dollar and the Swiss franc including the programming routines, algorithms and applications in MATLAB, RATS and EVIEWS.
Abstract This paper examines the covered and uncovered interest parity between U.S. dollar and Swiss franc by first using simple summary statistics for the spot and forward rates as the mean, kurtosis, skewness and standard deviation. The paper then presents the covered interest and uncovered parity hypothesis and applies tests to examine its validation, as deviations from covered interest parity, regression analysis, threshold autoregression and exponential transition autoregression. Based on this extensive research, the paper rejects these covered and uncovered interest parity hypotheses.
Table of Contents:
Introduction
Literature Review
Data
Summary Statistics
Random Walk
Unit Root and Stationary Tests
Covered InterestRate Parity
Linear Tests
Non Linear Tests 1
Threshold Autoregressive (TAR) Models
Smoothing Transition Autoregressive (STAR) Models
Uncovered InterestRate Parity
Vector Error-Equilibrium Correction Model (VECM)
Impulse Responses
Threshold Vector Error Correction Model
Dynamic OLS (DOLS)
Conclusions
Appendix: Program Procedure Routine for TSAY Test of TAR Nonlinearities in winRATS 6.0
Appendix: Program Procedure Routine for AR(1)-TAR Estimation in winRATS 6.0
Appendix: Test for Linearity against ESTAR and LSTAR and Secification Test between ESTAR and LSTAR selection in winRATS 6.0
Appendix: Program Procedure Routine for AR(1)-LSTAR-GARCH(1,1) Estimation in Eviews 6.0
Appendix: Program Procedure Routine for AR(1)-LSTAR-OLS Estimation in Eviews 6.0
Appendix: Program Procedure Routine for AR(1)-ESTAR-OLS Estimation in Eviews 6.0
Appendix: A Different Procedure Routinefor AR(1)-ESTAR-OLS Estimation in Eviews 6.0
Appendix: MATLAB Routines for Grid Search and STAR Estimation
Instructions
MATLAB Routine for Grid Search on STAR Models
MATLAB Routine for STAR Models Estimation with Various Methods
From the Paper "Descriptive statistics for the spot and three-monthly and six-monthly forward exchange rates returns are reported in table 1. We observe that in all cases negative mean returns are observed, but one might say that are very close to zero. Also in both three rates returns negative skewness is presented, but kurtosis is very close to three, as is defined by the normal distribution. Based on the Jarque-Bera statistics the hypothesis of normality for spot and forward exchange rates is not rejected."
Abstract Examines several issues related to the history of simple & compound interestrates. Centers on loans, credit. Defines terms. Overview of history of interestrates; fluctations; government economic policy decisions; supply & demand for money. Summary of averages of prime short-term rates (19th & 20th Centuries). Suggests that interestrates are tied to non-economic as well as economic factors.
From the Paper "Introduction
Sidney Homer (1963), in his seminal history of interest rates, argues that such a history of often dramatic interest rate fluctuations provides an excellent summary of the success of some communities and the failures of others to develop effective commercial ethics and laws and suitable monetary and fiscal techniques and policies. While "credit" is considered a modern device (or vice), a brief survey of financial history will demonstrate that credit was in general use in ancient and in medieval times, antedating industry, banking and even coinage. It is the purpose of this brief report to examine selected issues related to the history of simple and compound interest rates, specifically on loans, and to consider periods when high rates were commonplace in their historical context."
Abstract Sidney Homer, in his 1963 seminal history of interestrates, argues that a history of often dramatic interestrate fluctuations provides an excellent summary of the success of some communities and the failures of others to develop effective commercial ethics and laws and suitable monetary and fiscal techniques and policies. While "credit" is considered a modern device (or vice), a brief survey of financial history in this paper demonstrates that credit was in general use in ancient and in medieval times, antedating industry, banking and even coinage. This paper examines selected issues related to the history of simple and compound interestrates, specifically loans and considers periods when high rates were commonplace in their historical context.
From the Paper "In this context, Gwartney and Stroup (1990) note that in Keynesian economic theory, the interest rate is linked to the supply of and demand for money. High interest rates have historically induced people to hold less money (i.e., to invest more), while low rates have the opposite effect. During normal times, the demand curve for money is like the demand curve for other goods; when the price (the interest rate) of holding money rises, the quantity of money demanded will decline. The Federal Reserve System, the U.S. monetary authority, often finds it necessary to intervene to "adjust" the interest rate to further "adjust" the monetary supply and demand curves and related activity."
Abstract This report discusses the volatility of interestrates and how that issue is important for insurance companies, especially those underwriting premature death risks and selling annuities. The report also presents insights into why interestrates are important for other financial institutions such as banks and corporations who hold interest related securities throughout their accounting processes. Finally, the essay offers a status of the interestrate risk management processes utilized by different corporations and the types of risk management throughout the market.
From the Paper "Banking is a business that deals with money and other instruments of credit. By money and instruments of credit we mean that although anything can function as money such as dollars, pennies, checks, sea shells and even rocks, it is the process of buying and selling. The idea of money presents an ideal solution for piano salesmen who no longer have to carry around their product for barter. Banks became middlemen in sales transactions in our modern way of thinking to replace the barter systems of old. The real genius in the idea of banks is the concept of interest. Banks created a new way to profit from their middle man status and these concepts arte the foundation of the credit process where banks and other institutions extend loans for longer periods of time in exchange for a payment in the form of interest. There are well over 25,000 banks and near-banks in the United States alone. "
