Financial Markets and Institutions Essay Example | Topics and Well Written Essays - 500 words - 1

Financial Markets and Institutions - Essay Example The interest can either be fixed or variable. Fixed-rate pays interest irrespective of the institution making enough money to pay, but variable rates can vary depending on the market conditions prevailing. The bonds which interest rate are expected to reduce can either be attractive or not depending on the view of the investor. A reducing rate bond will earn less hence unattractive, but on the other side it can be a tax haven vehicle as corporate bonds are subject to federal taxes in mark up. Low-rate bond will either be tax exempt or attract low taxes hence it can be attractive from this viewpoint. To a firm a reducing rate bond is attractive as it will cost less to issue and service the bond. Conversely, a firm expecting the rates to increase has to consider other cheaper sources of financing like bank loan if it has less interest rate than what they will pay on bonds (Zacks ETF Research,2012). 14. Bond Downgrade. . Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors that currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future. Downgrading a bond would mean that the price of the bond will reduce significantly to market equilibrium set by sentiment about the company’s ability to service the bond. Downgrading arises from the ability of the company to service the bond which can be observed from the financial status of the company. If the company is facing financial difficulties, it might be able to pay the bonds when they mature or service current interest rates. Current investor will lose the value of their investment hence can offload the bond which can further reduce the price because of the low demand. When the price will have fallen to the least possible, it can be attractive to new investors who think that the price will rise in future. 15. Junk Bonds. Merrito Inc. is a