StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Summary of Chapter 1_The End of Risk-Free Rate - Assignment Example

Cite this document
Summary
While this was practical aspect in the past, the sense of the term ‘risk-free’ has changed in the contemporary world since nothing is truly free. This…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.7% of users find it useful
Summary of Chapter 1_The End of Risk-Free Rate
Read Text Preview

Extract of sample "Summary of Chapter 1_The End of Risk-Free Rate"

Summary of Chapter 1_The End of Risk-Free Rate Summary of Chapter 1_The End of Risk-Free Rate While trade risks usually refer to monetary losses, risk-free rate refers to an investment return without financial loss. While this was practical aspect in the past, the sense of the term ‘risk-free’ has changed in the contemporary world since nothing is truly free. This changed due to the emergence of the financial crisis. This eliminated the idea of free-rate government bonds and brought other negative economic implications such as monetary devaluation, which is the main reason behind inflation.

A government bond has an essential role in how the society functions. This is because the bonds provide funds for healthcare, education, law enforcement as well as other public requirements. The most common theories associated to risk free rate and from which other valuations are derived include modern portfolio theory (MPT) and the capital asset pricing model (CAPM). Additionally, the risk free rate functions in rare occasions since the MPT maintains that there is only one risk-free rate, which is the risk-free rate asset that pays a low rate.

The risk free rate is used by MPT to determine the optimum portfolio. At the basic level, risk is said to be the probability of outcomes or events and is divided into three main categories that include absolute, default and relative risk. There have been attempts to use alternatives to the risk-free rate such as the T-bill that remains the best option since it was the closest investment to a short-term riskless security. The main reason why the risk-free rate has changed is the catastrophic events happening in most developed countries’ economies that include credit market collapses, stock market collapses, and wars.

The valuation level of the risk-free rate can be determined or judged through the Fisher equation. The idea that treasury bills have yielded zero or negative in certain periods indicates that there is no real risk-free rate. On the other hand, there have been increased debts in major governments and the development of other aspects such as debt mutualization. This is because of realization of too little growth versus intense debts. In some instances, the total debt has exceeded the total GDP.

Without growth, fiscal consolidation proves futile. Fiscal measures should be permanent to help in reduction of debt. If austerity is followed, it could take approximately 10 years to realize results. Debt ratio might increase by attempting to reduce it through austerity, which adds risk premium to government bonds over time. The market demand for safe assets has increased in the recent past although few are being issued. This increases their prices leading to inflation especially in a post financial crisis era.

Prior to the financial crisis, there were regulations such as inflation targeting policies that reduced economic risks. Underpricing of safe assets has been viewed to be connected to the over-reliance on credit ratings as well as the wrong incentives. Safe assets usually fulfill the criteria of low credit and market risks, limited inflation risks, low exchange rate risks, and high market liquidity. Investing in a negatively yielding bond expects the return of zero coupon bond minus a short rate, a forward rate minus expected future spot rate, and a zero coupon yield minus the average expected short rates.

The zero bound is a constraint or a limit in using conventional tools. MPT maintains that diversification is achieved through buying the market portfolio.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Summary of Chapter 1_The End of Risk-Free Rate Assignment”, n.d.)
Retrieved from https://studentshare.org/business/1630062-summary-of-chapter-1the-end-of-risk-free-rate
(Summary of Chapter 1_The End of Risk-Free Rate Assignment)
https://studentshare.org/business/1630062-summary-of-chapter-1the-end-of-risk-free-rate.
“Summary of Chapter 1_The End of Risk-Free Rate Assignment”, n.d. https://studentshare.org/business/1630062-summary-of-chapter-1the-end-of-risk-free-rate.
  • Cited: 0 times

CHECK THESE SAMPLES OF Summary of Chapter 1_The End of Risk-Free Rate

Popular Uprisings in the Middle East

Management Management Outline: Introducing the paper Popular uprising Introduction to popular rising in Middle East General effects on economy and businesses Specific effects on three international companies 1.... Company # 1 + actual example 2.... hellip; Company # 2 + actual example 3.... Company # 3 + actual example Management Lessons learnt Work Cited Introducing the paper: This paper is written in consideration to the subject of “International Management”....
11 Pages (2750 words) Essay

Marriage From the Economic Viewpoint

hellip; The earlier premise of the male dominated household, in which the male was the breadwinner and the woman the housewife began to be challenged after the end of World War II.... Opportunities for women had expanded by the end of the war since some of them had trained to take over male dominated jobs in factories, shops and other establishments.... Name of the of the Instructor Subject Date Submitted summary of Chapters 10-12 of ‘The Economics of Women, Men, and Work' In Chapter 10 of the book, the authors talk about the changing role of work and its impact on the family....
3 Pages (750 words) Essay

National Income Issues

These two are related in the sense that the real exchange rate is equal to the nominal exchange rate multiplied by the ratio of price levels in the two countries.... Thus, if the real exchange rate is high, foreign goods are relatively cheap, and domestic goods are relatively expensive.... On the other hand, if the real exchange rate is low, foreign goods are relatively expensive, and domestic goods are relatively cheap.... The real exchange rate is directly related to net exports in the sense that when real exchange rate is high and domestic goods are less expensive, it is expected that net exports will be greater as domestic goods will appeal more to other countries and exports are higher....
4 Pages (1000 words) Essay

The Regionl Growth of sin Countries

The аrticle scientificаlly written by Professor of Economics Terutomo Ozаwа criticаlly reflects the Pаx-Аmericаnа Led Cаtch-Up, Flying-Geese Style thаt greаtly influenced the economies of Eаst Аsiа.... It is first discussed the regionаl growth of Аsiаn countries,… the essence of Hegemon-Led Mаro-Clustering Style аnd Flying-Geese Pаrаdigm, then the process of demаnufаcturizаtion аnd tertiаrizаtion in the US is provided аlong with the role of different Аsiаn countries in the Geese Pаrаdigm, finаlly export competitiveness Through 30 yeаrs аfter the WWII, the economies of Eаst Аsiа hаve seen their growth rаtes surge аheаd of everyone elses....
11 Pages (2750 words) Essay

The International Business Entry Strategy, Aussie Fresh in Vietnam

The reporter underlines that Vietnam, one of the emerging nations across the globe, is a densely populated country that hosts around 100 million people in 2009 – 2010.... Moreover, the country recorded real GDP growth of over 5% in 2009 even during challenging global business environment.... nbsp;… The agricultural output of the nation and its share in Gross Domestic Product has reduced to nearly 20% in 2009 in comparison to the output of 25% in 2000....
9 Pages (2250 words) Essay

Project Management of Nigel Longford

In the end, the team would be responsible for a workable website that should be launched on the given date.... This is a project management report for the same task. In this stage,… A project charter is a document that formally recognizes the existence of a project and provides a summary of the projects objectives and management (Schlwalbe, 2008). In this case, the project charter deals with the marketing and launch of a The project is to be completed within one month and has a budget of 50,000 dollars....
7 Pages (1750 words) Case Study

Binomial Method in Option Price

This chapter intends to introduce the research background and related concepts.... Also, the scope and limitations of this research are detailed in this chapter.... The following research “Binomial Method in Option Price” illustrates the use of the Binomial method for pricing European and American options....
48 Pages (12000 words) Assignment

Targeting the Federal Funds Rate

on September 18, 2007, the Federal Open Market Committee (FOMC) announced that it would lower its target for the federal funds rate by one-quarter of a percentage point to 5.... percent, the first rate reduction in more than four years.... hellip; The researcher states that in cutting the target rate, the FOMC expressed concern that the fallout from rising mortgage default rates could spread to the wider economy.... It is evidently clear from the discussion that by lowering the federal funds rate, the Fed hoped this would add liquidity to financial markets and strengthen the economy....
7 Pages (1750 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us