Explaining Yield to Maturity and Yield Curve, Importance of Financial Intermediaries, Factors Determining Time Lag in Monetary Policy

This article explains Yield to Maturity and Yield Curve, Importance of Financial Intermediaries, Factors Determining Time Lag in Monetary Policy. It discusses how yield to maturity is used to calculate the yield curve and investors track moves in it, why financial intermediaries are vital to a well-functioning financial system, and the factors that determine the time lag between the application of instruments or tool of monetary policy and achievement of the ultimate goal.

MONEY AND BANKING

TABLE OF CONTENTS
Explaining how yield to maturity is used to calculate the yield curve and investors track moves
in it. 1
Analyzing statement ‘Financial intermediaries are vital to a well-functioning financial system’
......................................................................................................................................................2
Discussing the factors determine the time lag between the application of instruments or tool of
monetary policy and achievement of the ultimate goal...............................................................5
REFERENCES................................................................................................................................8

Explaining how yield to maturity is used to calculate the yield curve and investors track moves
in it.
Yield to maturity is the total anticipated return that is expected on a bond when it
matures. This is expressed as the annual rate of return which is considered to be important in the
longer run in turn deeper understanding about the highlighted subject matter can be gained. This
is as well referred as the book or redemption yield that is basically internal rate of return if held
to the maturity (Benzoni, Chyruk and Kelley, 2018). This is basically required rate of return for
all present vale of all the cash flows of the bond which is equal to the current price of bond. It is
earned by those investors who have bought the bond he today at the market price. It is computed
by paying attention on the formula such as having face value divided by present value and
multiplying by 1 the whole outcome is divided by time period from which 1 is subtracted.
Formula = [ (Face value/ present value) 1/ time period]-1
yield curve us a graph which depicts how the interest on the debt instruments such as
vary as a function of their years remaining to maturity. It is largely calculated as of the same
point in the time. This is the graph that is horizontal for the time line or years remaining to the
maturity and on the other side, vertical depicts the annual yield to maturity. This is a line that
plots yield which are interest rates of the bonds having equal credit quality but differing maturity
dates. It helps in getting the indicator of potential return from debt fund so that calculating is key
to grip on how it will affect outcome of it. In addition to this, much emphasis is provided on n
having the calculation regarding face, market value, annual coupon rate and time to maturity.
The normal yield curve is the graph in which short term debt instrument have lower yield than
longer term. The slop of the yield curve helps in explaining how bond market expects short term
interest rates to move in the future (Bauer and Mertens, 2018). A normal type of yield curve
helps in understanding that how steadily with the length of time until they mature for the longer
duration.
There are several objectives of investors for which several crucial course of action is
taken in order to have depth understanding. The yield curve is helpful in gaining the information
regarding the short term expected rates to move in future by focusing on the prevailing
economic and the inflation (Hillebrand and et.al., 2018). There are different kinds of curve
which permits to set the measure the feel of the market at the time often n investors get the
knowledge for creating base line for making decision. There are different kinds of objectives
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which provides assistance in holding the direction of an economy. It can be flat or inverted curve
that is helpful in presenting the significant change in market & investors behaviour. With help of
this risk, information regarding the prevailing risk with the particular bond can be ascertained.
This as well provides the ability to the investor to interpret the information regarding the
appropriate direction in which economy can be moved. In addition to this, caving the
information regarding the investors expectations can be ascertained by focusing for future
interest rates, economic growth & inflation, etc.
From the evaluation of the above information it can be mentioned that maturity is on X
and yield is on Y axis which helps in ascertaining that curve is sloping upwards and downwards.
On the basis of this it can be interpreted that this allows to get the most reliable, foreshadow
major events & turning points in both financial market & economy. These all information
provides assistance in gaining accurate insights to understand that particular bond should be held
or buy in turn strategic management of t monetary funds can be done by referring the crucial
points articulated by yield curve.
Analysing statement ‘Financial intermediaries are vital to a well-functioning financial system’
Financial intermediary is the entity that acts as a middleman between the two parties that
are conducting the monetary transactions. In the current environment complexity regarding
execution of financial transaction as inclined which require to get the significant information
related with crucial parties become possible. There are different kinds of financial intermediaries
such as banks, credit unions, insurance companies, mutual fund organization, building societies,
stock exchange, etc. there are several reasons for which financial intermediaries are considered
to be vital in the financial system which are as follows. The one of the significant aspect that is
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required to be taken into practice is making efficient market and lower cost of doing business.
This helps the parties to get the ability to coordinate with changing circumstances by
accomplishing all prevailing complex requirement of financial system.
The financial system is the place where set of institutions such as banks, insurance
companies, etc. includes the borrower, lenders, investors, etc. that exchange current funds to
finance projects so that pursue return on investment. Role of financial intermediaries are
important in the system as they allow to facilitate the flow of money from the lenders to
borrowers’ hat aids in improving the economy. There is different requirement of distinct players
in the market which can allow to accomplish their investment related objectives. It includes
saving transaction cost, avoiding asymmetric information, etc. This allows the users to get fixed
income at the lower cost with help of having contact with the financial intermediaries
(Importance of Financial Intermediaries, 2022). The mentioned participant of the financial
system helps to monitor the borrower to get the accurate information by declining risky factor by
getting proper solution for the investment.
The one of the major role that is concerned with significance of the financial
intermediaries involves playing role in the saving investment process. There are different kinds
of requirement of the investors that can be accomplished by offering diversification based
service (Fontana and Passarella, 2018). To satisfy the portfolio preferences of the depositor and
borrowers at the same time. They play role of supplying the debt instruments to the borrowers
independent of the type of assets so that both parties requirements can be accomplished.
Bridging the gap between borrowers and lenders is as well exerted by the financial
intermediaries.
There are several functions which are played by the financial intermediaries, thus
considered to be crucial in respect to gain the higher efficiency in the process of investment. The
one of the biggest function is to convert savings into investment. Intermediately like commercial
banks provide storage facilities for cash & other liquid asset. In addition to this giving short long
term loans, accepting the deposits from the entities with surplus cash, etc. The another function
is to get the assistance to the clients to grow their money via investment. Intermediaries like
mutual funds & investment banks to use their experience for offering maximization of return via
mitigating the risk.
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These are considered to be important as various benefits are provided by the financial
intermediaries to the other players. They help in lowering the risk of an individual by offering
the relevant solutions to the users performing in the financial market. This is exerted by pooling
risk by spreading funds across a diverse range of investment & loans. The economies of scale
can be achieved by reducing the cost of transaction in turn higher profitability situation can be
created (Di Tella, 2019). There are different kinds of the financial intermediaries that focuses on
the ensuring that appropriate level of action can be taken for smooth functioning of the system.
The customization service offering is one the competitive advantage that is achieved by the users
that permits to take the higher level of risk. This is inclining the cope of financial practices and
boosting the overall economy. In addition to this, risk spreading, safe investment, higher
convenience, economies of scale, financial specialist and greater liquidity. Mobility of the funds
can be properly done by focusing on financial intermediaries.
This comprises the certain steps which is considered to be the one of the continuous
process. It includes transforming the saving into investment, helps to store cash, precious metals
& assets, maximizing return & reducing risk and providing short & long both term loans. Proper
payment mechanism is developed by this parties in order to provide the trustworthiness scenario
in the market so that higher level of convenience while dealing can become possible. The main
reason underlying this fact is to have the depth, accurate, relevant, precise, etc. kind of
information to investors so that problem solving approach can be developed to have greater
interest in dealing with financial system.Proper information processing and payments
mechanism so that higher profitability and stability based objective of all participants can be
accomplished. The greater amount of the efficiency can be received through gaining fair course
of action regarding value maximization and declined cost of capital. In the UK financial system
there are series of unregulated networks. There are number of such middleman in the specified
area where higher focus on offering specialization based service is provided that is improving
the standard of loving of people. There are various employment opportunities are as well created
which boost economic development and allow inclining scope of financial market.
In order to coordinate with the legal requirements of the financial market there is need to have
relevant knowledge about acceptance of activities or not (Zachosova, Babina and Zanora,
2018). Financial intermediaries provide such depth understanding that makes possible to
elimination of irrelevant factors so that higher ability to get smooth functioning can become
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possible. on the basis of given information, it can be specified that there are various crucial
activities which are executed by financial intermediaries that provides assistance in gaining
smooth functioning of system. With help of this, grabbing number of opportunities can become
possible which can aid in receiving higher profitable deal in market. Efficient allocation of
resources, optimum utilization, expertized based decision-making, availability of funds,
reducing cost, economies of scale, mitigation of risk, etc. are the benefits which can be received
by having these intermediaries in financial system. These allow helps in obtaining highly smooth
functioning financial system that makes possible to accomplish objectives in effective pattern.
Discussing the factors determine the time lag between the application of instruments or tool of
monetary policy and achievement of the ultimate goal
The monetary mechanism is the process by which central bank of the country pay attention
on controlling the mobility of the funds. In order to make the strategic decision it is important
for the central bank to pay attention on having relevant strategy to ensure that proper
functioning in market by expansion or contradicting the funds for having smooth functioning of
economy. There are several objectives of monetary policy that pay attention on managing the
prices so that situation like inflation or unemployment for having proper maintenance of the
currency can become possible. In addition to this, having relevant ability to maintain a low &
stable inflation rate so that achieving long term GDP growth trend can be received. It is the one
of the policy which is implemented by the economy to ensure that appropriate stability to keep
price stable can be executed in turn stable growth can be implemented. There are few factors
that are required to be taken into consideration for receiving appropriate ability to determine
the time lag so that relevant implementation of tool can become possible. The components
which are need to be highlighted for ascertaining the lag in this which includes recession,
inflation, delay in recognizing problems, gradual response & time of investment, etc. In addition
to this, interest rates effect on cash flow consequence in liquidity constrained borrowers, other
asset prices, credit supply, adjustment in investment to stocks, etc. that affect the particular
policy.
There are different kinds of expansionary & contractionary policy that both are applied in
different situation. The contractionary policy increase the interest rate for the short term in order
to slow down the money supply & bringing down inflation. This is considered to be one of the
appropriate strategy which helps to cool down the economy & check the prices in check. On the
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other side, expansionary monetary policy is helpful in increasing economic growth by expanding
activity. In this interest rates are lowered to boost spending money and makings saving
unattractive. It increases the supply of money in market so that higher ability to increase
outcome can become possible. The ultimate goal of the monetary policy is to increase or
decrease the supply of money in market in turn having relevant level of action to manage the
practice can become possible.
There are different kinds of tools which can be applied by the central bank in order to
accomplish the ultimate goal of economy. This tools that can be helpful in achieving objective
involve the reserve requirement, open market operations, the discount rate, etc. This is distinct
between qualitative & quantitative tools aids in gaining appropriate approach to meet the
particular objective.
There are few other tools which can be used for controlling the supply of money. It
involves bank rate policy, open market operation, variation in the reserve ratios. These methods
of monetary policy faces the lag in the application in order to attempt for controlling the price
level. The variation in the reserve ratio is basically concerned with commercial banks to have
certain portion of their total assets in the form of cash reserve. This is basically done by two
ways such as cash reserve & statutory liquidity ratio (Peydró and et.al 2021). The CRR refers to
certain percentage that commercial bank net demand & time liabilities have to maintain with
central bank that is 0.50%. SLR refers to some percentage of reserve to be maintained in terms
of gold which is 0.25%. These impact the ability of the central bank to influence the short term
interest rates & controlling pricing level.
Open market is one of the significant strategy w that is helpful in selling & purchase of
security in the long run in turn influencing the structure of the interest rate & stabilize the market
for government securities which provides ability to meet objective of a controlling supply of
monetary resources (Cecioni and et.al., 2019.). It helps in declining the money supply as money
gets transferred from the commercial bank to central. These include certain factors that influence
the open market operation such as under developed, securities market, etc. Repo rate at which
commercial banks borrow money by selling their securities to central bank for maintaining
liquidity that helps in controlling the inflation. A reserve repo rate is the process in which the
central bank of the country borrows the money from the commercial banks in case of excess
liquidity prevailing in the market. In this case the rate is kept is high so that commercial banks
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get encourages providing money to central bank in turn managing the liquidity of market can
become possible. These all are involved in transmission mechanism of monetary policy tht
provides assistance in affect the economy by influencing short-term interest rates.
Qualitative method is helpful in discriminating between various uses of credit so that
influencing both borrowers & lenders can be exerted. This includes rationing of credit,
regulation of consumer credit, change in marginal requirements and moral suasion.
The moral suasion is one of the method that is helpful in having commercial banks from the
central bank that provides assistance in retaining credits in inflationary (Bernanke and et.al
20200. It suggests that commercial bank to reduce credit supply for the speculative purpose
under the moral suasion. Change in the marginal requirement is associated with certain margin
to the proportion of loan amount that is not financed by the bank. This method is basically
related with having the change in loan size so that encouraging credit supply for the crucial
sector. These methods are helpful in managing the monetary activities of the business so that
proper effective outcome can be derived.
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REFERENCES
Books and Journals
Bauer, M.D. and Mertens, T.M., 2018. Economic forecasts with the yield curve. FRBSF
Economic Letter. 7. pp.8-07.
Benzoni, L., Chyruk, O. and Kelley, D., 2018. Why does the yield-curve slope predict
recessions?. Available at SSRN 3271363.
Bernanke. K and et.al 2020. The new tools of monetary policy. American Economic Review.
110(4). pp.943-83.
Cecioni and et.al 2019. Unconventional monetary policy in theory and in practice. In Innovative
Federal Reserve Policies During the Great Financial Crisis(pp. 1-36).
Di Tella, S., 2019. Optimal regulation of financial intermediaries. American Economic
Review. 109(1). pp.271-313.
Fontana, G. and Passarella, M.V., 2018. The role of commercial banks and financial
intermediaries in the New Consensus Macroeconomics (NCM): A preliminary and critical
appraisal of old and new models. In Alternative Approaches in Macroeconomics (pp. 77-
103). Palgrave Macmillan, Cham.
Hillebrand, E and et.al., 2018. Using the entire yield curve in forecasting output and
inflation. Econometrics. 6(3). p.40.
Paul and et.al 2020. The time-varying effect of monetary policy on asset prices. Review of
Economics and Statistics. 102(4). pp.690-704.
Peydró . D. and et.al 2021. Monetary policy at work: Security and credit application registers
evidence. Journal of Financial Economics. 140(3). pp.789-814.
Zachosova, N., Babina, N. and Zanora, V., 2018. Research and methodological framework for
managing the economic security of financial intermediaries in Ukraine. Banks & bank
systems, (13, Iss. 4), pp.119-130.
Online
Importance of Financial Intermediaries. 2022. [Online]. Available through: <
https://www.cfajournal.org/importance-of-financial-intermediaries/ />.
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