Financial Markets and Risk Essay Example | Topics and Well Written Essays - 1000 words

Financial Markets and Risk - Essay ExampleThe long term savings and investment products offered by banks and NBFIs are mostly life assurance, pensions and other investment products such as fixed deposits with a long term maturity. Fixed deposits are time deposits which retrovert a higher interest rate than the normal demand deposits. Pension products are aimed at meeting the retirement needs of investors wherein a lump conglutination amount is given to the investor which is accrued over the years. Investing in bonds (government and corporate) is another option where there is much safety even though the returns may be comparatively less. Some banks and many NBFIs provide plat word form to invest in mutual funds also. II. Implications for individual savers and investors of a significant increase in the general interest rates. The most visible incumbrance due to the increase in interest rates is on the loans borrowed and deposits made by individuals. An increase in interest rate mea ns increase in the repo rates of banks. This entrust result in an increase in the mortgage loans interest as comfortably as other loans and debts like credit card debt. The increase in interest rate on loans will force the individuals who already borrowed the loans to pay more on the interest and this will ensue to fewer savings. Those who had plans to borrow loan will postpone the same in order to be relieved of the senseless burden of higher interest repayment. Another aspect is with the timing preference of making deposit. Since the interest rate is high, the return on investment from banks in the form of deposits will also be high which will prompt the individuals to make more investments out of their savings. Exchange rate changes can also be an effect of interest rate change. When the interest rate increases, there will be more inflow of foreign money in the form of FIIs. This will lead to an increase in the value of the domestic currency. The implications are that, the in dividuals who invested in foreign currency will see their value of investment come down in terms of domestic currency due to the decrease in value of the foreign currency, other factors remaining the same. Also this will make imported goods relatively cheaper to the domestic buyers which in turn force the domestic producers to slew their products price which means more savings for the individual. Rise in interest rates will also affect stock and securities like bonds. When interest rate rises, the price of existing bond falls. This is because investors can get higher rates on newly issued bonds. A rising interest rate may affect the stock market also because 1) investors will turn to buy bonds as they give mend yield, 2) investors need to pay more to borrow money and spend them, which will lead to a slump in the growth of many companies which produce consumer goods. III. Risks to commercialized banks of a significant rise in general interest rates. All banks face interest rate risks. Changes in interest rate can reduce a banks earnings and lower its net worth. Interest rate risk is defined as the volatility in earnings or the value of a financial institution owing to unexpected changes in interest rates. The chief source of interest rate risk is the mismatched re-pricing of a financial intermediarys assets and liabilities.