Question

Biggest changes expected in the world of finance (Interest rates).

Please provide a 10-15 pages on the above topic focussing on Interest rates.

Answer 1

Biggest changes expected in the world of finance (interest rates )

As we know that in the global world or any economy, financing ability is the most important tool to enhance the growth in any instances & that belongs to the interest rate changes or monitory policy of the particular country. Basically interest rates are the part of the micro economic factor.

As mentioned above in the topic, biggest changes in the world of the finances , I would define it into the 2 main categories first belongs to the developed economy & second for developing economy, In the global market interest rates are going down for financing facility in the developing countries like India, in the other end interest rates are almost stable for financing facility in the developed country like UK,USA etc.

Interest rates changes & impact on stock markets of the world

Global interest rates are on the rise after a prolonged period of record-low rates, which means that international investors may want to reassess their interest rate risk exposure. While higher interest rates don’t always translate to a decrease in equity prices, bond prices tend to be more universally affected and certain equity sectors may benefit of suffer more than others. International investors can hedge their portfolio by taking these trends into account.

Interest Rates and Equity Prices

Interest rates are simply the cost of using someone else’s money. Since central banks print money, they can influence these rates by increasing or decreasing the amount that they charge other banks to access money. These changes have ripple effects across the entire economy as these higher costs are passed on to businesses and then consumers. In fact, interest rates are the primary conventional monetary policy tool in use today.

Central banks use interest rates to control inflation in two ways:

• Raising Rates: An increase in interest rates makes money more expensive, shrinks the money supply, and encourages consumers to save.
• Lowering Rates: A decrease in interest rates makes money cheaper to borrow, increases the money supply, and encourages consumers to spend.

Interest rates primarily affect equity prices through their influence over business and consumer behavior.

Raising interest rates encourages businesses and consumers to borrow less and spend less, which leads to less revenue and net income. Lower revenue and net income lead to lower stock prices and potentially lower price-earnings multiples. The opposite is true when interest rates are lowered, spending increases, and financial performance improves.

Interest rates also impact equity valuations by changing the discount rate. If the value of an equity is equal to the value of all future earnings in today’s dollars, investors must apply a discount rate that represents the prevailing interest rate over the period. Rising interest rates mean that a company’s stock is worth less today, which would theoretically reduce the equity’s valuation and market price at the time of the interest rate hike.

Some sectors may benefit from higher interest rates and others suffer more than others. For example, the financial industry tends to receive a boost because they can charge more for lending money. Higher interest rates lead to an increase in mortgage rates and a potentially higher net interest margin for banks. But, manufacturing companies may suffer as higher interest rates tend to lead to a stronger U.S. dollar and less competitive global prices.

The Global Economic Recovery

Central banks dramatically lowered interest rates in response to the 2008 financial crisis. In fact, many countries had near-zero, zero, or even negative interest rates. Central banks that were still experiencing a crisis then turned to unconventional monetary policy strategies, such as quantitative easing (QE) to bolster the markets and restore confidence. After several years, these strategies succeeded, and the market has stabilized to a large degree.

With full employment and signs of inflation, the U.S. Federal Reserve began raising interest rates and tapered its bond-buying programs. The European Central Bank (ECB) has similarly moved to taper its bond-buying programs and could raise interest rates in late-2018. After many years of near-zero interest rates, these trends could lead to risks for bonds and equities.

The pace of the interest rate hikes is slow but could have a big impact on the market.

The best historical comparison is the period following World War II. At the time, U.S. interest rates were very low and the Federal Reserve held a large number of Treasury securities. The central bank began to hike rates in the early 1950s and inflation remained in check through the early 1960s. The 10-year Treasury yield hit just five percent, but the S&P 500 rose by about 500 percent, showing that equities can be resilient to rate hikes if the underlying economy is strong.

Other non-U.S. markets may experience these same dynamics as they begin to taper asset purchasing and eventually raise interest rates. It’s important to consider why interest rates are increasing rather than looking at it as an isolated event. And even if U.S. equities are holding up during a rising-rate environment, international equity markets could outperform U.S. equities if their rates are not increasing given the strength in the U.S. dollar.

Rising interest rates result in lower bond prices and higher bond yields and vice versa for falling interest rates. But, not all bonds are the same. Bonds with a longer maturity tend to fluctuate more in relation to interest rates than short-term bonds. This is because interest rates that are rising are more likely to remain higher over a long period of time, which results in a greater opportunity cost when it comes to finding more attractive yields elsewhere.

The Impact of a Fed Interest Rate Hike

When interest rates increase, there are real world effects on the ways that consumers and businesses can access credit to make necessary purchases and plan their finances. This article explores how consumers will pay more for the capital required to make purchases and why businesses will face higher costs tied to expanding their operations and funding payrolls, when the Federal Reserve increase the target rate. However, the preceding entities are not the only ones that suffer due to higher costs, as this article explains.

When interest rates increase, there are real world effects on the ways that consumers and businesses can access credit to make necessary purchases and plan their finances. This article explores how consumers will pay more for the capital required to make purchases and why businesses will face higher costs tied to expanding their operations and funding payrolls, when the Federal Reserve increase the target rate. However, the preceding entities are not the only ones that suffer due to higher costs, as this article explains

The following provides a breakdown of what consumers and businesses can expect as a result of the Federal Reserve's recent interest rate increase.

Things That Traditionally Increase When the Fed Increases Interest Rates

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

The Prime Rate

A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.

Credit Card Rates

Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.

Impact of a Fed Interest Rate Change

Savings

Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.

U.S. National Debt

A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt. A report from 2015 by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, estimates that the U.S. government may end up paying $2.9 trillion more over the next decade due to increases in the interest rate, than it would have if the rates had stayed near zero.

Things That Are Largely Unaffected When the Fed Increases Benchmark Interest Rates

Auto Loan Rates

Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve's announcement because they are long-term loans.

Mortgage Rates

A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates.

Things That Traditionally Decrease When the Fed Increases Interest Rates

Business Profits

When interest rates rise, that’s typically good news for the profitability of the banking sector, as noted by investment giant Goldman Sachs. But for the rest of the global business sector, a rate hike carves into profitability. That’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.

Home Sales

Higher interest rates and higher inflation typically cool demand in the housing sector. On a 30-year loan at 4.0%, home buyers can currently anticipate at least 60% in interest payments over the duration of their investment. Any uptick is surely a deterrent to acquiring the long-term investment former President George Bush once described as central to “The American Dream.”

?Consumer Spending

A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing.