# Forum post responses (finance class)

I need a 100-word reply to each of the following 8 post. (800 words total). I do conduct a plagiarism check before I make the final payment (been burned in the past) so please make it original (most of you are great and I have been totally satisfied).

These post are from a finance course:

Forum #1

If Bank A has an increase in deposits of \$100M and their required reserves is 10%, then the must hold \$10M in required reserves.  This means that there is \$90M in excess reserves that is available to loan, assuming that they want to use all of it for loans instead of making investments.

Bank A

 Assets Liabilities Required reserves                          +\$10M Checkable deposits                         \$100M Excess reserves                                 \$90M

If Bank A loans out the entire \$90M, then another bank will receive the funds as checkable deposits and also be required to hold 10% of the amount in reserves.  At this point, we’ll call it Bank B, they will be required to hold \$9M in required reserves and have \$81M in excess reserves available to loan.

Bank B

 Assets Liabilities Required reserves                             +\$9M Checkable deposits                          \$90M Excess reserves                              +\$81M

Then let’s say that Bank B loans out all \$81M and this amount gets deposited into Bank C.  Bank C is now required to hold \$8.1M in required reserves and has \$72.9M in excess reserves, which it can also loan out.

Bank C

 Assets Liabilities Required reserves                          +\$8.1M Checkable deposits                        +\$81M Excess reserves                              \$72.9M

At this point, the money supply has grown by \$271M (\$100M Bank A + \$90M Bank B + \$81M Bank C).

The process can repeat, each time increasing the money supply and is called multiple deposit creation.  The textbook provides a definition, “Part of the money supply process in which an increase in bank reserves results in rounds of bank loans and creation of checkable deposits and an increase in the money supply that is a multiple of the initial increase in reserves” (Hubbard, 2013, p. 427).  The amount of the money supply has grown due to the original source that Bank A has received the \$100M from.  Bank A has helped to increase the money supply by loaning the \$90M it had in excess reserves.  Therefore, Bank A’s contribution was the \$90M.

In order to discover how much money the banking system as a whole can create, the simple deposit multiplier can be used.  This is “[t]he ratio of the amount of deposits created by banks to the amount of new reserves” (Hubbard, 2013, p. 427).  This can calculation can be used for this scenario because the simple deposit multiplier assumes that no banks are going to hold any excess reserves beyond the required amount of 10%.  The initial amount of increase in deposits was \$100M and of that amount \$10M was required in reserves.  Therefore, the simple deposit multiplier is \$100M/\$10M and is equal to 10.  The banking system as a whole should end up with \$1B in this case, \$100M is 10% of \$1B (\$100M/10% = \$1B).  The Fed often originates the growth of the money supply in this manner by making open market purchases.

Reference

Hubbard, R. (2013). Money, Banking, and the Financial System (2nd ed.). New York, N.Y.: Pearson. ISBN: 9780132994910

Forum #2

With this week’s discussion, Bank A has increased deposit of \$100M and a reserve requirement of 10%.  This means that Bank A must hold \$10M (\$100M * 0.1) for the reserve requirement and can use the other \$90M (\$100M – \$10M), or excess reserves, for loan issuance.

Now in terms of money created by the whole banking system we must find the find the simple deposit multiplier which is “the ratio of the amount of deposits created by banks to the amount of new reserves”, (Hubbard & O’Brien, 2014).  This can be displayed as such

Deposits / Required reserve = Simple deposit multiplier

\$100M / \$10M = 10

With this in mind, we know that based on the prompt, other banks are not holding any reserves beyond the required 10%.  So we would take the initial increase in deposits and multiply it by the simple deposit multiplier (SDM), as such:

Initial Deposit * SDM = total money created

\$100M * 10 = \$1B

So the initial deposit can created up to \$1B of money for the banking system as a whole.

References:

Hubbard, R. & O’Brien, A. (2014). Money, Banking, and the Financial System, 2nd Ed. Upper Saddle River, NJ: Pearson Education, Inc.

Forum #3

Monetary goals, in regards to policies and the economy itself, typically revolve around the general well-being of the economy. What influences the state of the economy? Excellent question, I’ll explain. In a brief summation, the economy is affected by steady employment, steady interests, and unfaltering production and financial markets (2013). So, what are the goals the Fed places in order to conjure these effects?

According to R. Glenn Hubbard, the goals are: “price stability, high employment, economic growth, stability of financial markets and institutions, interest rate stability, and foreign-exchange market stability” (2013, p 228).  After the crisis of ’07-’09, the Fed changed a few things. They started buying and selling more securities than the traditional T-bills, and this helped stabilize long-term interest rates and supported the credit flow in the financial system. The Fed also increased the interest rates on reserves held by banks; this allowed more reserves to be held by banks, therefore increasing the money supply. The Fed also works with the FOMC to ensure the real federal funds rate is equal to the target inflation. Another way of looking at it is that if the real GDP is lower than the targeted or expected GDP, the FOMC will raise the targeted federal funds rate.

Reference
Hubbard, R. (2013). Money, Banking, and the Financial System (2nd ed.). New York, N.Y.: Pearson.

Forum #4

The Fed has several goals that are intended to help the economy including “price stability, high employment, economic growth, stability of financial markets and institutions, interest rate stability, and foreign-exchange market stability” (Hubbard, 2013, p. 448).  However, by working at two of those goals, maximum employment and price stability, generally all of the other goals will be met.  This dual mandate is accomplished by using some monetary policy tools.

One of the policy tools used is using the open market to complete the purchase and sales of securities.  Securities are purchased by the fed to cause an increase or reduction in the money supply, which influences bank reserves and interest rates.

Another monetary policy tool is the discount policy.  The discount rate, including the terms, is set in order to effect the rate at which loans are made to banks.

Reserve requirements are also used as a monetary policy tool.  The percentage of required reserves is set in order to influence the amount that must be held.  This will affect the money supply by determining the money multiplier.

The FOMC sets a target for the federal funds rate, which is the amount of interest that banks charge one another on loans that are short-term.  This rate is effected by the demand and supply for reserves.  The fed pays interest on reserves held and this interest rates sets the floor for the federal funds rate.  “As the federal funds rate increases, the opportunity cost to banks holding excess reserves increase because the return they could earn from lending out those reserves goes up” (Hubbard, 2013, p. 453).  The fed conducts operations on the open market to try to hit the federal funds rate target.

To help with the recession, the federal funds rate target was lowered and treasury securities were purchased.  In addition, the discount rate was also lowered.  The purchase increased the supply of reserves and decreased the federal funds rate.  This had the effect of increasing the equilibrium level of reserves.  When the Fed wants to slow the economy, they also have done the opposite.  They increase the federal funds target and raise the discount rate.  They sell securities on the open market to decrease the supply of reserves.  This has the effect of increasing the equilibrium federal funds rate.

The Fed has also used discount policy in order to aid in recovery from the recession.  Several temporary lending facilities were opened in order to help other depository institutions other than just members of the Federal Reserve System.  This was to help bail out many financial institutions.

I do agree with the Fed intervening in difficult economic times.  The Fed is there to help stabilize the economy for the good of citizens.  Without this intervention, the state of our economy would be much worse off, in my opinion.  Having this type of system helps keep the country running more efficiently than it would otherwise.  I do not think that they economy would eventually even out on its own.

Reference

Hubbard, R. (2013). Money, Banking, and the Financial System (2nd ed.). New York, N.Y.: Pearson. ISBN: 9780132994910

Forum #5

One type of international banking office is called an Edge Act Bank.  These types of banks were started in 1919 as part of an amendment to Part 25 of the Federal Reserve Act.  The purpose of an Edge Act Bank is to “allow U.S. banks to be competitive with the services foreign banks could supply their customers.” (Eun & Resnick 2015) This service allows MNCs to conduct financial transactions associated with their foreign business without having to go overseas.  These services include “accept foreign deposits, extend trade credit, finance foreign projects abroad, trade foreign currencies, and engage in investment banking activities with U.S. citizens involving foreign securities.” (Eun & Resnick 2015).

These types of banks don’t compete with domestic commercial banks and as of 1979, “the Federal Reserve has permitted interstate banking by Edge Act banks”. (Eun & Resnick 2015)  This type of international bank helps US MNCs be as competitive as possible financially in their global business.

Reference:

Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.). New York: McGraw-Hill Irwin. ISBN: 9780077861605

Forum #6

The type of international banking office i choose to focus on is Offshore Banking Centers and services it provides such as “accepting deposits and granting loans in currencies other than the currency of the host country.”Eun, C. S., & Resnick, B. G. (2015) The Offshore Banking Centers secure global business through the provision of trust company administration, specialized services, such as being an intermediary in shipping, corporate consultancy, structured financial transactions, insurance and mutual fund administration.

Forum #7

International Bonds

A firm desiring to raise capital by issuing Eurobonds will first contact an investment banker and inquire about them serving as lead administrator of a backing cartel that will usher the debt notes to market. The lead administrator will usually ask other bankers to form a managing group to help discuss terms with the borrower, determine market conditions, and manage the issue.

What should a borrower consider before issuing dual-currency bonds?

“Dual currency bonds are attractive to MNCs seeking financing in order to establish or expand operations in the country issuing the payoff at maturity currency. During the early years, the coupon payments can be made by the parent firm in the issuing currency. At maturity, the MNC anticipates the principal to be repaid from profits earned by the subsidiary, which is the currency that will be used at repayment. The MNC may suffer an exchange rate loss if the subsidiary is unable to repay the principal and the payoff currency has appreciated relative to the issuing currency.” Eun, C. S., & Resnick, B. G. (2015).

What should an investor consider before investing in dual-currency bonds?

“The maturity amount of the principal at repayment is set at inception; commonly, the amount allows for some appreciation in the exchange rate of the stronger currency. From the investor’s viewpoint, a dual currency bond comprises a long-term forward contract. If the second currency appreciates over the life of the bond, the principal payout at maturity will be worth more than a return of principal in the issuing currency. However, if the payoff currency depreciates, the investor will suffer an exchange rate loss.” Eun, C. S., & Resnick, B. G. (2015).

Consequently, both the borrower and the investor are exposed to exchange rate uncertainty from a dual currency bond.

Reference:

Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.). New York: McGraw-Hill Irwin. ISBN: 9780077861605

Forum #8

Discuss the process of bringing a new international bond issue to market.

International bonds are not a new concept.  They have been used by different countries to raise capital for specific projects, to finance infrastructure or as a way to fund a war effort.

The process of bringing a bond issue to market is somewhat complex and requires the involvement of many.  First of all, the borrower will determine the amount needed and then will work to engage the services of an investment bank.  The investment bank will serve as the lead manager and work with an organization that underwrites the bond.  The investment bank that serves as the lead investor works to establish the terms with the borrower determines market conditions and manages the overall issuance of the bonds. Eventually the bond is brought to market and is offered to members of the public.

What should a borrower consider before issuing dual-currency bonds?

Dual-currency bonds have inherent risks because they are issued in one currency and paid in another.  Borrowers who are considering the issuance of a dual-currency bond need to consider the potential for a significant change in the exchange rate.  In these situations, the exchange rate could have a positive or negative affect on the amount the borrower receives.  For instance, if the currency the bond was issued in increases, the borrower benefits; if the value of the issue currency decreases, the borrower could suffer an overall loss.

What should an investor consider before investing in dual-currency bonds?

Investors are not immune to the risk associated with a dual-currency bond.  They also have the potential to gain or lose as a result of a change in the FX rate.  In this case, if the value of the currency the bond is issued in decreases the investor stands to gain as a result of the decrease; but if the value of the issue currency increases, the investor loses out because the payout currency has a lesser value than when weighed against the issue currency.

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