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Thread: Any Econ. Majors? Looking for Education re: Bonds/Banks/Fed

  1. #1

    Default Any Econ. Majors? Looking for Education re: Bonds/Banks/Fed

    Woohoo, crazy theories likely based on misunderstandings. Care to correct me where needed?

    1) As Fed target rates decrease, prime lending rates decrease, correct?

    2) Long/Short treasury rates tend to rise and fall in near-synchronization with the prime rate, right?

    3) Huge and highly liquid corporations (usually insurance and financial institutions? [well, not this time ]) can issue ridiculous amounts of bonds (staying within the "investment grade" spectrum) for ~4% annually when Fed rates are around present levels, correct?

    4) What's to prevent a corporation from just riding the cycles; issuing huge amounts of bonds when the fed target rate is ~0-1% and then selling in times of a boom when they can buy back the bonds at ~50-60% of the value (as their bond rate will be ~4%, while most are at 10-20%)? Could it be in the best interest of the corporation to post poor numbers, depress the bond prices further (wouldn't the loss from the interest rate be depressing the price as well if the loaned money0 weren't put to work?), have the execs snap up the stock at ridiculously low prices, sell the bond, and have a 40% gain show up one quarter boosting the stock price incredibly and making stockholders that much richer? Would analysts/investors notice in time?

    5) Is this (#4) a contributing factor to the boom-and-bust economy or just a wild theoretical that doesn't (or can't?) happen in the United States?



    6) What's the point of overnight bank lending in the era of electronic money?



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  3. #2

  4. #3
    “I will be as harsh as truth, and uncompromising as justice... I am in earnest, I will not equivocate, I will not excuse, I will not retreat a single inch, and I will be heard.” ~ William Lloyd Garrison

    Quote Originally Posted by TGGRV View Post
    Conza, why do you even bother? lol.
    Worthy Threads:

  5. #4

  6. #5

    Exclamation

    Quote Originally Posted by Kludge View Post
    .... It's 320 pages.
    best get busy then

  7. #6

    Default

    Quote Originally Posted by Kludge View Post
    .... It's 320 pages.
    and it's FREEEEEEEEEEEEEEEEE!!!!!

  8. #7

    Default

    1. Most of the time, but not always...take a look at this crisis...in theory rates should fall, but they really didn't for a while (some are now)

    2. Again, in theory the SHOULD...reality is a completely different story. Pull some historical information.

    3. Yes, very sound companies issue bonds a little above Treasury rates...whatever that may be at the time. That can change though...as we see with this finacial crisis...fear takes away a lot of the fundamentals...so don't always assume it to be true.

    4. There's a lot of rules and regulations that go into the issuance of bonds, the call period, etc. that is something I really don't see happening though

    5. refer to 4 haha

    6. I'm not sure what you mean...overnight bank lending is to help banks meet any demands there may be for deposits...

    I tried haha
    Privatize the profits, socialize the losses. - Government at its best.

  9. #8

    Wink

    Quote Originally Posted by danberkeley View Post
    and it's FREEEEEEEEEEEEEEEEE!!!!!
    Wait... but they are capitalists?! WTF?! THIS IS SOEM KINDZ OF SOCALSISM!!111

    “I will be as harsh as truth, and uncompromising as justice... I am in earnest, I will not equivocate, I will not excuse, I will not retreat a single inch, and I will be heard.” ~ William Lloyd Garrison

    Quote Originally Posted by TGGRV View Post
    Conza, why do you even bother? lol.
    Worthy Threads:

  10. #9

    Default

    Thanks Icon... I'm really interested in economics and am considering formal education in it, but I doubt I could find a job teaching it. Most high schools only have one non-required class relating to economics.


    @6 I don't really understand interbank lending. Do individual banks need to meet the fractional rate, or is that for the collective corporation? I figured it was the former, and didn't understand why banks wouldn't just take money from some collective fund the corporation allowed its banks to draw from. And if it's the latter, why wouldn't a bank just quickly liquidate by selling off enough metals/stocks/bonds/etc. to meet their reserve requirement instead of resorting to a loan?

  11. #10

    Default

    I'll give it a shot.
    1) the Prime Rate is one of the interest rates the Fed sets. It is based on the Federal Funds rate which is the rate at which banks can borrow from the Fed to meet their reserve needs. Banks are required to keep a certain percent of the total amount of their deposits on hold (either at the bank or on deposit with the Fed). But their balance sheet may change during the day. Maybe they wrote a bunch of loans one day but did not take in as much in deposits. This means that they are short of reserves and have to increase them. They have two places they can borrow- either from the Fed or from another bank which may have excess reserves (maybe they got a lot of deposits but few loans). These funds are generally overnight to balance their books for the day.

    2) Treasury Rates. When the government has to raise money to pay their bills and don't have enough in tax revenue they issue Treasury Notes. The Treasury determines how much in funds need to be raised and issues the proper amount in T-Notes. The price of these are set via auctions. Buyers make bids for how much (dollars worth) they want to buy and what price they are willing to pay for them. (the notes are issued at a certain face value at maturity but are sold at a discounted price and the difference reflects the rate of return or the interest rate it yields). The notes are sold at the highest price which will allow them to sell all the notes- say $10,000 notes selling for $9,900. These rates are set by the supply and demand for the notes and are independent of any rates the Fed may set.

    3) I really do not know much about corporate bonds, but they probably also depend on what the market will bear. If they set their rates too low, they will not be able to sell all of them. Set their rates too high and they have to pay more to borrow the money the bonds help raise.

    Skipping to #6- that is covered in #1.
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  12. #11

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    Fantastic. I wasn't aware that corporations ever issue more bonds than they are able to sell. I figured that since they are bound by regulations to only issue something close to their net worth, they wouldn't ever be in that situation, but I suppose that in extreme cases, there simply wouldn't be the demand for them.

    I still don't understand why a bank would resort to interbank lending instead of liquidating. What does a bank do the next day when they need to repay the loans? Do they just not issue any loans that day and only accept deposits??

  13. #12

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    They of course would have to re-adjust the loans they make (unless they get more deposits coming in). But the rates are very low. Some may take the overnight lending to help further their ability to make loans if they can get enough spread between what the Fed is charging them and what they can issue the loans for. The lending is usually just a temporary thing while liquidating something would probably cost more and be a more long- term solution.
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