Foundations of Finance and Investment Essay Example | Topics and Well Written Essays - 1500 words

Foundations of Finance and Investment - Essay ExampleThe Repo pasture is the short-term enliven rate at which monetary institutions such as banks and building societies can borrow money from the BOE for a two-week period. The MPC meets monthly to set the Repo rate as part of its monetary policy persona to control inflation. Its decision on what this rate should be acts as a signal to the money markets of how much to pay savers and charge borrowers for the use of money. The Repo rate consequently acts as the baseline for the cost of money that can be loaned to customers, which can include other banks, in the form of mortgages and oerdrafts (BOE, 2005).Many households and firms, however, borrow for longer clip periods and prefer to fix borrowing costs in advance, either because this helps them plan their cash flows better or protects them from the future risk of rising interest rates. This is a gamble some lenders and borrowers scram, since interest rates may also move the other way. Fixed long-term borrowing or interest rates argon relevant to those who want fixed-rate mortgages for housing or to firms with long-term investment plans like expanding a factory that needs some years to pay off. Long-term interest rates ranging from one to ten years are calculated simply by taking an average of forecast short-term interest rates over the desired period.Short- and long-term interest rates are closely related, but differ on the basis of MPC decisions the expectations of how the national parsimony will fare the anticipate future inflation rates and how likely the MPC will achieve its inflation targets (BOE, 2005). The direction of short-term rates is easy to determine because the figure depends on the a la mode(p) interest rate decision of the MPC that can either raise or lower the Repo rate. Long-term rates, however, may go either way, determined by how the economy will perform many years from now. It can happen that whilst the MPC raises the Repo rate next m onth, ten-year rates may go down if the market thinks such a decision will cause rates to fall in the future. Future rates depend on how reliable the market finds the MPC (Barrell et al., 2006, p. 60).In deciding to hold in the Repo rate at the same level in April 2006, the MPC considered several rigorously monitored variables such as U.K. inflation (down from 2.0% to 1.8%), money supply (M4, the sum of notes, coins, and so-called panoptic money consisting of what is held in bank and building society accounts, grew 12% in the year to February), economic growth (in line with first quarter trend rate at 0.6%), U.K. consumer spending and manufacturing (growing steadily), asset prices (rising prices of equities and houses), the sterling exchange rate (weakening or depreciating to the dollar and the Euro), risk of higher inflation (rising due to the increase in energy and oil prices), the economic performance of the U.S., the so-called Eurozone (EU countries that have the Euro as its c ommon currency), and Japan (inflation, exchange rates, asset prices, etc.), wage pressures (rising average real harvesting wage balanced by lower growth of average real consumption wage the first refers to the real cost incurred by employers whilst the second refers to the take home pay of employees), and consumer surveys on inflationary expectations (rising), a key emotional factor that influences personal decisions to either save or spend.Inflation - the rise in prices of a basket of goods and services in the whole economy - if