Money Banking and Finance: IRR, Financial Intermediaries, and Monetary Policy

This article discusses the concepts of Internal Rate of Return (IRR) and Yield to Maturity (YTM) in Money Banking and Finance. It also critically analyzes the statement that financial intermediaries are vital to a well-functioning financial system. Additionally, the article explores the factors that determine the time-lag between the applications of instrument or tool of monetary policy and the achievement of the ultimate goal.

Money Banking and
Finance

Table of Contents
Part B .............................................................................................................................................3
Define the Internal Rate of Return (IRR) is the Yield to Maturity (YTM). ...................................3
Part C .............................................................................................................................................4
‘Financial intermediaries are vital to a well-functioning financial system’. Critically analyse
this statement. ............................................................................................................................4
Part D .............................................................................................................................................7
Discuss the factors that determine the time-lag between the applications of instrument or tool
of monetary policy and the achievement of the ultimate goal....................................................7
REFERENCES................................................................................................................................9

Part B
Define the Internal Rate of Return (IRR) is the Yield to Maturity (YTM).
Explain how the YTM is used to calculate the yield curve and why investors track moves in the
yield curve. (Bachmann, 2019)
The internal rate of return is always calculated considering the organisation perspective as in
IRR an entity wants to evaluate whether the proposed project is financially viable for the
business concern or not. The more the IRR the higher chances of proposal being selected by
enterprise. Where as in yield to maturity, the expected return has been calculated by an investor
who invest their funds in business concern so that they can get their desired returns. YTM is a
measure of bond rate of return that considers both income by way of interest and capital gain or
loss.(El Ibrahimi and et.al., 2021)
We can say that YTM is bond internal rate of return as it is calculated when bonds current
market price and cash inflows including interest and principal till maturity of the bond is known
to the organisation. YTM equal the current price of bond with the future payment which is
earned by stakeholders in form of present value of cash inflow which includes interest also and
maturity value at the time of redemption of these bonds if they hold till maturity by the users.
It can be said that the correct method for calculating yield to maturity is internal rate of return
however as a practical consideration there is another approach to calculate it by using the
following formula as under: -
YTM = Interest + (Redeemable value – Current Market Price) / N
(Current Market Price + Redeemable Value) / 2
It is important to understand that the above formula is not provide the exact YTM, it just
calculates the approximate YTM. The exact amount of YTM is calculated by using trial and error
method which is used to calculate internal rate of return. The correct YTM is when occurs when
security expected return matches with the current market price of bonds.
Yield curve is nothing but the graphical presentation of interest payments earned by the investor
who invested in entity’s bonds till maturity of such bonds. It also highlights the maturity value
earned by stakeholders on maturity. This curve ranges ups and downs in graph as and when there
is fluctuation in the cash inflows received by investors. On the X axis of such curve interest

payments will be put on and on Y axis the total years are mentioned when such bonds get
matured.
The proposed investor will regularly track such curve in order to ensure that whether the
organisation is providing better returns to their investors or not. On only proposed but also the
stakeholders who already purchase bonds of the business concern regularly track the same as if
such graph decline from their expectation, then they will sell such bond. In order to avoid loss on
such investment in it necessary for them to regularly monitor the movement of their funds with
the help of yield curve(Farag and Johan, 2021)
Further this curve is of multiple types such as normal, upturned, sharp or parallel and so on. The
shape of this curve is affected by various factor such as inflation, growth rate of economy or
interest rate in the market etc. Therefore, investor much consider these factors also before
making judgement regarding the securities issued by the organisation in the market.
In order to interpret yield curve, the key points are mentioned below which an investor considers
below and after investing funds:
 The normal yield curve indicates that company is earning the profit by maintaining their
stability with the period of time as and when it gets mature0
 The yield curve on the upper side from the begging indicates that the organisation is
growing with higher pace.
 The downside yield curve indicates that business in not meeting the expectation of
investors in the short- and long-term bonds.
 The flat yield curve indicates that the organisation is not providing additional benefit to
their users and so on(Hao, Wang and Lee, 2020)
Part C
‘Financial intermediaries are vital to a well-functioning financial system’. Critically analyse this
statement.
A financial intermediaries is the third person who is responsible for the transactions
between the individual and other business entities. These intermediaries includes mutual fund,
investment bank, pension fund and commercial bank. These helps in reducing the cost of the
business operations and helps in creating efficient financial market. They did not accept deposits
from the general public but they only provide factoring or leasing services. These financial

intermediaries helps in reducing the risk of uncertainties, reduces cost, provides economies of
scale. It helps in moves funds from the organisation which have surplus of funds to one whom
are in need of funds. With the availability of funds the overall cost of conducting business
reduces and helps in creating a efficient market. Overall stability of a country can tracked by the
activities of financial intermediaries and growth of financial service industry. These
intermediaries saves a large corpus of funds and then they invest those to various organisations,
which provides a firm with surplus of funds that helps in making new financial decision.
Types of intermediaries:(Hill, Steurer and Waltl, 2020).
Stock Broker: It is a person who has license of stock exchange and provides services of
making trade of shares on stock exchange. Purchase and sale of stocks can only be performed by
the broker registered at the stock market. These brokers works under the prescribed guidelines of
Security and Exchange Board of India(SEBI). Only one demat account can be opened by a single
broker as it is backed by PAN card.
Various ways of interacting with the broker:
The person can directly go the office of the broker and can execute his transaction.
Client can call the broker and with the unique code make the transactions of shares.
Most popular way of trading is by themselves. In this the individual itself has to make
transaction on the agent portal. In this process the client has to select the securities in which
they want to invest and complete the transaction.
Services provided by the brokers,
They provides a platform to transact in the market securities.
Provides trading margin for the persons whom want to trade in stock market.
Provides support in dealing with any issues caused in the trade.
Supports transfer of funds from bank account to the trading account.
Brokers charges a fees to facilitate the transaction known as 'Brokerage charge'(Kunrath and
et.al., 2020).
Depository and depository participants: These entities provides services of keeping the
records of the various investors and agents. When an investor buy an share the certificate is
issued by these depositories which authenticate these transaction. A share certificate is piece of
document which earlier used to be issued physical form but now it is transferred to the digital to
the demat account. This change in the form of certificate is known as Dematerialization. These

are only a few intermediaries that have the data of all the demat account holders. Every account
is The depositories helps in opening demat account which is opened by the online process and
the person need not go to the depository office for opening the account. KYC of the document is
being done the website by authenticating it with the government records.
Functions of the depository system
 Dematerialisation- Dematerialization is a procedure in which physical share credential
are regenerate electronically and the same amount of Electronic shares are transferred in
the Demat account of the beneficiary owners.
 Corporate actions- The depository is accountable for digitally transferring cash,
dividends or bonus shares, etc into the shareholder's account.
 Pledge and hypothecations- Security held by the beneficiary proprietor can be used as
collateral security to borrow money from the market. Depository furnish a collateral
account in which pledge securities are kept till the time borrowed money remains unpaid.
Banks: The banks plays an important role in the transfer of funds which is the basic
requirement in the trading of a securities. Banks provides services of deposits and withdrawals.
These services helps the organisation. The money is transferred from the bank account linked
with the demat account, the amount cannot be transferred from any bank account for the purpose
of trading. Brokers provides a window for the bank account, there is one primary account and
secondary bank accounts can also be added to the demat account which is used for the trading in
the market(Motta and Sharma, 2020)
Benefits of financial intermediaries:
They provides a favourable way for the investors and borrowers, they are not the expert of
finance. Thus this helps in the their future interest in the company.
They provide detailed analysis and interpretation of risk and reward.
Economies of scale helps in lowering the cost of financing. As they evaluate the credit risk of the
companies and provides detailed analysis.
They provides a safer way of investment by providing the details and dilute the risk between the
investors.
It helps the investor in knowing the best method in which they can invest and the other aspects of
the financial management.

The above stated entities fulfils the requirements of trading in stock market. If any one
among them is absent from the process, the transaction cannot be fulfilled. These entities are
generally also known as financial negotiator. If there is no stock broker then nobody can make a
transaction. Any transaction in the financial market can be complete with a agent only. Any
person cannot reach the exchange for their trading transactions. Financial bodies involved in the
process needs to follow guidelines issued by the SEBI.(Souza and et.al., 2018)
Part D
Discuss the factors that determine the time-lag between the applications of instrument or tool of
monetary policy and the achievement of the ultimate goal.
Monetary policy are the policies that are undertaken by the central bank to manage the
stability in order to promote the balanced and sustainable development of the economy. The
foremost objective of the policy is to ensures price stability. The money supply affects the rate of
inflation in the economy. Inflation rate is describes the rate at which the cost of the products are
increasing over a period of one year. The impact of monetary policies can not be seen directly, it
can be seen in terms of investments in the long run.
In short run and medium run, the monetary policy measure the influence the economic
activities, inflations and others factors as well. Monetary policy regime states various steps taken
for the proper functioning of the economy. Most common monetary policy regime are,
 exchange rate
 monetary targeting
 inflation targeting
Exchange rate: These are the rates which are determined by the market forces. Exchange
rate is generally measured in terms of Dollar and the value of currency is defined in respect of
dollar. Apex bank of every country defines the value of the currency in respect of per dollar. If
the exchange rate increases that means the purchasing power of the country has decreased with
the appreciation of currency and if is is decreased than the purchasing power of the currency
increases. Currency of any country works as a main tool of achieving their monetary goals. If the
country want to use this regime in their favour then they have to have a lot of foreign reserves
and gold to appreciate the currency of the country. For example :A fixed or pegged rate is
discovered by the authorities through its central bank. The rate is set against another major world
currency (such as the U.S. dollar, euro, or yen). To keep its exchange rate, the government will
buy and sell its own currency against the currency to which it is marking(Souza and et.al.,
2018)(Sun and De, 2019)

Monetary tax regime: This is one the monetary tax regime used to as the indicator of
money supply. It provides direct relation between the consumer price index and intermediate
target. To regulate the bank liquidity it plays and important role. This helps the central banks to
concentrate on the core business of the the banks that is to control the supply of money and
control the value of the currency (Torres‐Preciado, 2021)(Wijesiri, Martínez-Campillo and
Wanke, 2019). These helps in reducing the influence of other factors of currency.
Inflation targeting: One of the objective of the central bank is to control the effect of
inflation in the economy. It is responsible for the increase in the cost a commodity, which makes
the product costlier as before. The rate inflation is controlled because it helps in reducing the
overall cost of the product which leaves more disposable income with the individual. If the
interest rate of loan reimbursement decreases than more loans are available to the individual and
if the interest rate is high then persons are not interested in taking loans as they become costlier.
Pros- Inflation targeting allows central banks to respond to shocks to the domestic
economy and focus on domestic considerations (Zarei and et.al., 2019). Firm inflation cut down
investor uncertainty, allows capitalist to anticipate alteration in interest rates, and anchors
inflation expectations. If the target is published, inflation targeting also allows for greater clarity
in financial policy.
cons- Inflation targeting became a central goal of the Federal Reserve in January 2012
after the fallout of the 2008-2009 financial crisis. By signing inflation rates as an expressed goal,
the Federal Reserve hoped it would help support their dual mandate: low unemployment
encouraging fluctuating prices. Disregard the Federal Reserve's best efforts, inflation still
This mechanism helps in reducing the impact of the global effect on the country. It helps
in reducing the impact of global factors by consolidating the values of the currency. Exchange
rate can be controlled by proper management of foreign cash reserves and gold reserves.
Monetary policies helps in reducing the burden of the country by making policies that benefit the
nation and its monetary terms.

REFERENCES
Books and Journals
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Hill, R.J., Steurer, M. and Waltl, S., 2020. Owner Occupied Housing, Inflation and Monetary
Policy.
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transpiration to untangle interactions between nitrogen supply and drought in maize and
sorghum. European Journal of Agronomy. 120. p.126145.
Lee, S. and Kim, Y.M., 2019. Inflation expectation, monetary policy credibility, and exchange
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Torres‐Preciado, V.H., 2021. Monetary policy and regional economic performance in Mexico: A
structural panel VAR approach. Growth and Change. 52(1). pp.195-223.
Wijesiri, M., Martínez-Campillo, A. and Wanke, P., 2019. Is there a trade-off between social and
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