Credit Crisis Analysis: Impact on Debt Market, Interest Rates, and IPO

This report delves into the profound impact of the credit crisis on various facets of the economy. It begins by outlining the core issues of the credit crisis, including the tightening of lending and its subsequent effects on the market, such as negative yields, increased risk premiums, and a decline in the stock market. The report then focuses on the crisis's influence on the debt market, highlighting how investor behavior, particularly the shift towards risk-free assets, led to decreased trading activities and liquidity. The report further examines the role of government and Federal Reserve policies in attempting to mitigate the crisis, and the resulting impact on interest rates and IPOs. It concludes by analyzing the overall impact on the economy, including the decline in investor confidence. The report provides a comprehensive overview of the financial crisis.

Running Head: PAPER OUTLINE
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PAPER OUTLINE
1. A. Credit Crisis
The credit crisis is a significant threat to the economy. It is a situation where the
availability of lending gets tightened due to the various activities. The consequences of the
credit crisis are negative yields in Treasury bill trade, risk premium soars in corporate bonds,
worst performance of the stock market, increase in illiquidity and increase in unemployment,
etc. when the credit crisis hit the market, it created more shock to the entire economy and it
affected the bond markets too.
1.B. Lack of Liquidity in Debt Market and Credit Crisis
More investors faced massive loss due to their investment decision of investing in
more risky assets and began to focus on making more investment in the risk-free asset. It
resulted in negative yield and lowering of the transaction in the debt market by lowering the
interest rate to nearly zero making the investment avenue more unattractive.
2. Debt Market Become Inactive
The credit crisis has a direct impact on these businesses when compared to the other
businesses that have the impact over the debt market trading activities. During the credit
crisis period, many investors prefer to hold more funds in the liquid assets when compared to
the illiquid assets that result in slowing down the debt market activities. Government policies,
reactions and Federal Reserve policies for collateralizing the loans with the new security
instruments and the purchase of MBS by them were the main reason for the leak in the
system. It will result in lower level of overall activities in the market and caused inactivity.
3. Interest Rate Impact
Credit crisis results in lowest interest rate in the history to improve the liquidity of the
market. The main reason for reducing the interest rate to the lowest was to provide facilities
to the institutions and companies to borrow funds at a lower rate and to manage their business
operations efficiently. This reduction in the interest rate was the main signal about the
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PAPER OUTLINE
marked downgrade in the outlook of the economy and indication about the increase in the
downside risks regarding inflation and the output.
4. Initial Public Offering
Investors lost entire confidence in the equity market, and they are not ready to take
any risk by investing in well-established enterprises. These crises created negative effect over
all the industries and companies listed in the exchange. It resulted in less participation of
companies in the IPO and had a negative impact on the entire business.
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