Financial Markets and Institutions

Financial Markets and Institutions

New York Stock Exchange, the types of transactions and Economic Impact

Financial markets are markets where buying and selling of securities occurs. A good example of a financial market in the United States is the New York Stock Exchange (NYSE) which is the largest stock exchange in the world where most of the oldest public companies trade their stocks. The NYSE is a capital market since it provides long-term financing for corporates. The NYSE offers transactions in seven liquids markets that make investors have access to stocks, bonds, and exchange-traded funds (ETFs) options (Briston, 2017). The stock exchange provides four different and unique equities exchanges that are designed to meet the needs of various investors and EFT issuers with greater variety to choose from on the way they intended to invest. As a financial market, some of the transactions supported there include the bond market and the stock market. In the bond market, investors buy and sell debt securities. Thus, the bonds are traded whereas notes and bills are exchanged in the bond market. The issuer of these debts is the governments and companies for reasons such as reducing their debt in their budgets, financing projects geared towards economic growth or supporting day-to-day operations.

The bond market in NYSE is segmented into primary market and secondary market. In the primary market, the issuers of bonds raise capital directly from bond buyers while in the secondary market, the investors trade the prior issued securities. For individual investors to participate in the bond market in NYSE they use retail brokers. The transaction performed in the New York Stock Exchange provides a great economic indicator for the economy. These transactions give an idea of how well the listed companies are performing in their business. This is because if the investors are confident they tend to buy stocks, stock mutual funds, or stock options. Therefore the financial experts are of the view that the stock market predicts how smart investors think about the country’s economy will be performing over the next six months. Through the stock market, the upcoming investors get a chance to invest in the economy. More so the savers can beat inflation since the value of invested funds in form of stock increases by about 7% per year adjusted for inflation which is better than bonds (Lioudis, 2021). Further, the businesses are getting a chance to finance their operations to facilitate their expansion strategies with ease. Thus US economy is the largest economy in the world its boom is destined to influence the global economy due to direct foreign investments and remittance.

Factors that affect interest rates

Several factors affect interest rates in the economy such as demand for money, supply for money, budget deficit and government borrowing patterns, level of inflation, global interest rates, and foreign exchange rates, and Fed monetary policy. The demand for money will be high in a growing economy. For example, the manufacturing sector will borrow money to finance their short-term and long-term activities aimed at boosting their production. The ordinary citizens will borrow money to finance their personal needs, buy homes and cars. However, in the shrinking economy, the demand for money is low both for individuals and corporates. Therefore the higher the demand for money the higher the interest rates holding all other factors constant. The money supply will affect interest rates since an increase in the supply of money with other factors constant the interest rates goes down. This is because the investors will buy bonds or deposits due to a lack of attractive investments in the economy. Thus the low demand for money pushes the interest rates down. For example, if people deposit the demonetized currency notes into their bank accounts the banks get flooded with money. Since the banks fail to lend all that money, they will invest in government securities leading to a decline in the yields on bonds even though temporary (Briston, 2017). Budgetary deficit and government borrowing patterns will affect interest rates since the government is the largest borrower in the economy as it seeks to plunge the budget deficit. Therefore the higher the fiscal deficit, the higher the government will borrow hence pushing interest rates upward.

Hence the bond yields will increase due to higher budgetary deficits. Inflation makes the savers in the economy be compensated by higher interest rates for the sacrifice they make in their current consumption motives due to the high general price in the economy. This makes investors forgo their current consumption for investment in fixed-income investments due to the positive real rate of return that is arrived after deducting the value of inflation from the nominal rate of return on bonds and deposits. The global interest rates and the existing foreign exchanges rates will influence the interest rate the Fed cap in the economy to attract foreign investments. Thus with attractive interest rates capital is attracted to the economy and the foreign exchange rate is supported. The Fed may decide to increase policy rates as an indication of higher interest rates in the economy hence attracting capital from foreign investors. When the was a global financial crisis the Fed lowered interest rates to pull the economy from the recession a move that was followed by other central banks in the world. The Federal Reserve has a critical role in influencing the interest rate in the economy (Kimberly, 2021). Thus the monetary policy adopted will depend on the happening in the economy. For example, in the boom phase, the Fed may opt to contain inflation hence raising the interest rates reducing consumption and investments guided by borrowed money. During the recession, the Federal Reserve induces growth by giving incentives for consumption and investments in the economy by lowering the interest rates. The Fed monetary policy is the biggest determinant of the interest in the economy due to its decision impact on the overall economy from employment level, consumption, and investment in the economy.

Ease or difficulty of forecasting interest rate changes. Assess the value the forecast provides.

The difficulty faced with forecasting interest rates lies in their volatility that occurs daily and exhibiting slow-moving trends such as a rise during a time of hyperinflation resulting in lasting decline (Schoenfeld, 2020). Therefore, the interest rates fail to operate on mean reversion within a constant average. However, the ease in prediction lies in the long term since it takes into consideration inflation trends and equilibrium interest rates. The forecast provides the rate a bank or other lender charges to borrow its money or the rate a bank pays its savers for keeping money in an account.

The importance of the Federal Reserve was created and is the role essential in the US economy.

Federal Reserve was created to monitor the happenings within the economy. Thus the Federal Reserve initiates Federal Reserve actions and communications that promote maximum employment, stabilize prices, and moderate the interest rates in the economy (Kimberly, 2021). The roles are essential to the US economy since they guide investments in the economy. For instance, when the interest rates are increased many investment opportunities are created in the economy lowering unemployment reducing inflation in the economy.

Recent monetary policy (adopted during the past 12 months), its current and future impact on the United States and global economies

The most recent monetary policy adopted in the US by Federal Reserve was regulating federal funds rate through Federal Open Market Committee (FOMC). Upon the onset of COVID 19, the Fed made it a priority to stabilize the Federal funds rate by keeping it at a very low rate of between 0% – 0.25%. As such, it promoted noncash payments through debit cards, credit cards, electronic transfers, and checks by the consumers and businesses in the economy. Thus the banks found it easy to undertake overnight borrowing among them spurring business activities due to stabilized interest rates stimulating economic growth (Schoenfeld, 2020). Further, the fed offered protection funds to small businesses to prevent them from total collapse due to the effects of COVID 19 such as a lockdown. Thus the small enterprises remained afloat making many people remain in employment. In effect, the global economy was affected as US businesses were willing to continue with their operations some that entailed importing raw materials from global partners amidst the scourge.

Finance Manager Strategy for the use of bond markets by either an investor or a firm.

As a finance manager, I would deploy the immunization bond strategy. The strategy entails investing a certain portfolio for a given period with little regard to the interest rates changes. The portfolio will be invested to achieve the desired return (Lioudis, 2021). The strategy secures the investor or firm return since there is no chance of default.


Briston, R. J. (2017). The stock exchange and investment analysis. Routledge.

Kimberly, A (2021). How does the Feds Fund Rate work and what is its impact.

Lioudis, N (2021). Top 4 Strategies for Managing a Bond Portfolio

Schoenfeld, J. (2020). The invisible risk: Pandemics and the financial markets. Tuck School of Business Working Paper, (3567249).

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