1976

According to the US Debt Clock, the national debt is continually increasing. Research the current Treasury Bill Rate and discuss whether or not the rate is low or high. If you

consider the Loanable Funds

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Theory, does the current interest rate make sense when you consider things such as the national debt, budget deficit, among others? Why or why not?

In addition, consider the historic

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below are examples of others work please keep similar

The loanable funds theory is based on the premise that the interest rate used will be determined by the amount of funds available and the demand for those funds. So, the interest rate is constantly adjusting itself to an equilibrium based on the supply and demand of funds (Saunders & Cornett, 2015). This theory, as the supply of available funds increases, so does the interest rate until the demand for funds wans. Once the demand is no longer prevalent, the interest rate starts to drop.

In looking at the current treasury bill rate on a 52 week bond, it is at 1.97 for the coupon rate as of 2/14/18. This is up from 0.83 on 2/14/17 for a 52 week bond. This means, according to the loanable funds theory, there is more funds available in Feb. of 2018 than there was in 2017. In looking at the U.S. Debt Clock both the Federal spending and the Federal tax revenue is up which lends credence to the rise in the treasury bill rate. With the increase in available funds, the interest rate will start to rise.

In looking at the rate for the last year, the treasury bill rate has had a yield curve that is upward sloping which is the most common type of curve for the treasury bill. This curve means the term to maturity of the bill is positive (Saunders & Cornett, 2015). The curve also supports the rising interest rate for the treasury bill rate that can be seen.

References

Information retrieved on 2/14/18 fromwww.treasury.gov/resoure-center/data-chart-center/interest-rate/

Saunders, A., & Cornett, M. M. (2015). Financial markets and institutions (6th ed.). New York, NY: McGraw Hill Education. ISBN: 9780077861667

example 2

The Treasury Bill rate is still what I consider to be low, although it is slowly edging upwards from historic lows over the last decade.In 2005, before the financial crisis took hold, the T-Bill rate was between 2% and 3%. Into 2007, it had increased to between 4% and 5% before beginning to tail off in the second half of the year to around 2.5%. 2008 rates fluctuated between 1.6% and 3.3% until March, then the rates plummeted over the course of the next few months, ending up at less than 1%, and on 11 Dec 2008 reaching an all-time low of -.01%, indicating that “investors were essentially paying the U.S. government to borrow money” (Saunders and Cornett, 2015, pg 29). T-Bill rates would continue at these historic lows for the next few years before beginning to trend upwards in a sustainable fashion in 2015. Rates for 2018 are hovering around 1.3% – 1.4%. (All T-Bill rate data was retrieved from U.S. Department of the Treasury, 2018).

The loanable funds theory seems pretty intuitive to me.As interest rates for borrowing money goes down, more people (businesses) are willing to borrow the available money, so demand increases. As interest rates rise, people (businesses) want to take advantage of increasing their wealth by investing in opportunities to leverage the higher interest rates. They are supplying money into investment accounts (i.e., Treasury Bills). The principle of equilibrium then comes into play to balance the supply and demand curves. In relation to the current Treasury Bill rates being relatively low, the theory continues to be that households (businesses) are still able to borrow money at low cost to provide for economic expansion (Saunders and Cornett, 2015, pg 34). This theory does make sense to me to continue to expand the economy in order to generate more growth and stability. This (in theory) will curb the national debt and budget deficit. But, there are many other factors that come in to play, such as political motivations (if we make more, I can spend twice as much), but since this is not a Poli-Sci class, I’ll leave it at that.

Looking at the yield curves presented by Saunders and Cornett (2015, pg 41), the most common (historical) curve represented in chart (a), I would consider this to be normal as one would expect higher returns with greater longevity of yield to maturity.Chart (b) would be short-lived with the expectation that higher yields would be available for shorter term maturities in order to inject more economic growth in the short term. Chart (c) is sustainable over the mid-term in order to balance the supply and demand as the economy stabilizes and transitions into economic expansion over the long term growth potential [chart (a)].

Saunders, A., and Cornett, M., (2015). Financial markets and institutions (6th ed.). New York, NY: McGraw Hill Education. ISBN: 9780077861667

U.S. Department of the Treasury, (2018, February 16).Daily treasury bill rates data.Retrieved from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billRatesYear&year=2018

example 3

ccording to bankrate.com (2018), the 91-day T-bill auction average discount weekly rate for Feb. 13th was 1.57%. This is a low rate as compared to the last 40 years of rates on a 3-month bill. T-bill rates, in the past 40 years, were as high as 16% or more (Saunders & Cornett, 2015). But since 2008, T-bill rates have been hovering at or below the 2% mark.

The loanable funds theory, takes into consideration the supply and demand of funds (Saunders & Cornett, 2015). With the national debt reaching $20 trillion dollars currently, it seems the debt has no effect on the T-bill rate. More importantly to the government, is the job of keeping a healthy economy and a robust banking system.

Furthermore, the most common type of yield curve is the upward sloping when yields rise steadily as maturity rises (Saunders & Cornett, 2015). Some factors that may affect the curve are default risk, liquidity risk, special feature or maturity premiums. According to Saunders and Cornett (2015) the unbiased expectations theory states that the yield curve reflects the markets current expectations of future short-term rates. Also, the liquidity premium theory and the market segmentation theory will affect the yield curve. Due to liquidity risk, investors will only invest in long term securities if they are paid higher interest. Investors also need to consider securities with different maturities as a viable option for alternative investing (Saunders & Cornett, 2015).

Bankrate.com. (2018). 91-day T-bill auction avg disc rate. Retrieved from https://www.bankrate.com/rates/interest-rates/91-day-treasury-bill.aspx

Saunders, A., & Cornett, M. M. (2015). Financial markets and institutions (6th ed.). New York, NY: McGraw Hill Education. ISBN: 9780077861667

Is the shape normal or abnormal? Explain why the shape is normal or abnormal and factors that make yield curve change from time to time.

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