Understanding Term Spreads or Interest Rate Spreads

Understanding Term Spreads or Interest Rate Spreads Term spreads, also known as interest rate spreads, represent the difference between the long-term interest rates and short-term interest rates on debt instruments such as bonds. In order to understand the significance of term spreads, we must first understand bonds. Bonds and Term Spreads Term spreads are most often used in the comparison and evaluation of two bonds, which are fixed interest financial assets issued by governments, companies, public utilities, and other large entities. Bonds are fixed-income securities through which an investor essentially loans the bond issuer capital for a  defined period of time in exchange for a promise to repay the original note amount plus interest. Owners of these bonds become debt holders or creditors of the issuing entity as entities issue bonds as a means of raising capital or financing a special project. Individual bonds are typically issued at par, which is generally at $100 or $1,000 face value. This constitutes the bond principal. When bonds are issued, they are issued with a stated interest rate or coupon that reflects the prevailing interest rate environment at the time. This coupon reflects the interest that the issuing entity is obligated to pay to its bondholders in addition to repayment of the bond principal or the original amount borrowed at maturity. Like any loan or debt instrument, bonds are also issued with maturity dates or the date at which full repayment to the bondholder is contractually required.​​​ Market Prices and Bond Valuation There are several factors at play when it comes to the valuation of a bond. The issuing companys credit rating, for instance, can influence the market price of a bond. The higher the credit rating of the issuing entity, the less risky the investment and perhaps the more valuable the bond. Other factors that can influence a bonds market price include the maturity date or the length of time remaining until expiration. Last, and perhaps the most important factor as it relates to term spreads is the coupon rate, particularly as it compares to the general interest rate environment at the time. Interest Rates, Term Spreads, and Yield Curves Given that fixed-rate coupon bonds will pay the same percentage of the face value, the market price of the bond will vary over time depending on the current interest rate environment and how the coupon compares to newer and older issued bonds that may carry a higher or lower coupon. For instance, a bond issued in a high-interest rate environment with a high coupon will become more valuable on the market if interest rates were to fall and new bonds coupons reflect the lower interest rate environment. This is where term spreads come in as a means of comparison.   The term spread measures the difference between the coupons, or interest rates, of two bonds with different maturities or expiration dates. This difference is also known as the slope of the bond yield curve, which is a graph that plots the interest rates of bonds of equal quality, but different maturity dates at a specified point in time. Not only is the shape of the yield curve important to economists as a predictor of future interest rate changes, but its slope is also a point of interest as the greater the slope of the curve, the greater the term spread (gap between short- and long-term interest rates). If the term spread is positive, the long-term rates are higher than the short-term rates at that point in time and the spread is said to be normal. Whereas a negative term spread indicates that the yield curve is inverted and the short-term rates are higher than the long-term rates.

A Christmas Memory and Money Essays

A Christmas Memory and Money Essays A Christmas Memory and Money Essay A Christmas Memory and Money Essay Essay Topic: A Christmas Carol Money can buy a lot of things but it cannot buy good health, respect, love, inner peace etc as these only come from good principles. A person can have million in his bank account but still feel poor because he is not content with his life, more money gives him only minimal satisfaction. Security come from within from knowing that what you have is enough for you to be happy, it comes from believing in your self. All of us tend to think that happiness comes from outside i. . through money. A short story that supports this notion is A Christmas Memory by Truman Capote it is the tory of a child who does not get anything for Christmas except handed down and worn out except for a kite but he is still satisfied and goes out to fly it. In another instance was when the family was offered money for a new Christmas tree but they refused it believing that their old tree was more precious and nothing could replace it. Both these examples reflect the importance of contentment and satisfaction over money. First and foremost, money is a medium of exchange. You use it to buy things. No one can live without money. We need to buy food and many basic necessities of life which are impossible to be bought without money. A rich man is seen in the society with respect and people around carry an honorable position for that man whereas a poor person is seen by people with the eyes of hatred and they do not poses a good impression. Mostly all of us try to be as rich as others and compete in this modern age, but only a few people are able to fulfill their dreams about being a millionaire, The importance of money becomes very clear when a person has no money, Money for a poor person is everything, it becomes very important for him to earn so that he can fulfill his basic needs. However, recently everyone has become consumption oriented. We want to buy anything that is new on the market and catches our interest and we are falling prey to the attractive packaging and advertisiments of a product. Thus we buy things that we have little need for which in turn makes us want more money. Money enables us to afford a better quality of life; more money means bigger and better houses and cars, better quality products, better entertainment etc. Another advantage is less stress in paying bills and other household expenses. Money may also allow a person to persue his dreams, for example a person who wants to attain higher education may not be able to without money. Literature also supports this in many places, one such example is where Charles Dickens in another Novel A Christmas Carol'[2] shows how love is pushed aside for money. This happens when young Ebenzer Scrooge had made a promise to a girl Belle to provide for her, however Belle chooses a crooked businessman Jacob as he offers her a quick gain of fortune to the girl. A number of quotations from the book the great Gatsby by F. Scott Fitzgerald[3] also highlight the importance of money. One such quote mentioned the effect that money has on Gatsby when he is unable to even speak in front of Daisy Buchnan as he gets intimidated by her wealth. This shows how wealth encompasses every aspect of our lives, so much so that it even reflects in the voice and mannerisms of a person. Another description from the same book is about a character Tom whose wealth has given him a lot of power. It allows him to treat others how ever he likes and his elitist nature also makes him power. Money may be a motivator it influences human activity from geological exploration to politics. Money itself may not be evil, it is the greed for money that becomes the root of evil. Despite popular arguments I believe that money does not make the world go around. we have created the monster and allowed it to take over and control our lives. 4]Even though money does have some importance in our lives as every aspect of our lives revolves around money, but if we tried to be content with less we may not face such dependency. The variety of products that we are faced with makes it very difficult for us to be content with what we have. We have made money so central to our lives that we place it above life and even happiness. This never ending pursuit of money has made the society a selfish one . People forget that there are many things that money cant buy. A Chinese proverb summarizes this argument very well by saying that money can buy a house but it cannot make a home, that it can not buy time, sleep knowledge, health, respect and a good life only the material aspects can be bought but not ones that come from within. Stephen R. Covey in his book seven habits of highly effective people also mentions that some of us tend to be centered around money and so our sense of security and happiness is directly related to how much money we have and since its human nature to never be satisfied with what one has he is likely to remain unhappy most of the time. Even a huge increase in wealth is unlikely to satisfy such a person. For this purpose we need to alter our centres to what we really want at the end of our lives. Money can buy a lot of things but it cannot buy good health, respect, love, inner peace etc as these only come from good principles. A person can have million in his bank account but still feel poor because he is not content with his life, more money gives him only minimal satisfaction. Security come from within from knowing that what you have is enough for you to be happy, it comes from believing in your self. All of us tend to think that happiness comes from outside i. e. through money. A short story that supports this notion is A Christmas Memory by Truman Capote it is the story of a child who does not get anything for Christmas except handed down and worn out except for a kite but he is still satisfied and goes out to fly it. In another instance was when the family was offered money for a new Christmas tree but they refused it believing that their old tree was more precious and nothing could replace it. Both these examples reflect the importance of contentment and satisfaction over money.

The long-term effects of unemployment on a person Essay - 1

The long-term effects of unemployment on a person - Essay Example Spending is reduced to buying basic items because of the uncertainty of getting a new job. Apart from cutting back on buying certain items the individual may also suffer some personal loss. Especially during this global recession a significant number of persons have lost their homes to foreclosure. It is likely that they may also suffer other financial loss. It is difficult to keep up with car payment, for example. In large families where the recently unemployed is the sole breadwinner the financial effect is more chronic. This can affect the lifestyle of everyone including children. Normal situations such as schooling, entertainment and extracurricular activities can be disrupted. Research has shown that long-term unemployment is experienced more among older as well as blue-collar workers. Many persons in these two categories sometimes do not have enough savings to sustain themselves during the jobless period. In the case of the older worker many of them have to use money from their retirement funds. Another effect of long-term unemployment is strained family relations. The sudden loss of unemployment puts a burden on other members of the family. It causes separation and broken relationships in many families that were already on the verge of break-ups. It takes time for both the unemployed and other family members to adapt to the new situation and status. Although they may realize that it is an uncontrollable situation it is difficult to accept the reality of it. Some persons have reported that they have lost contact with friends during their period of unemployment. The inability to socialize with persons due to lack of extra cash can be a factor. Some persons may have to borrow money from family and friends and the inability to repay these loans can destroy friendships and other relationships. Long-term unemployment can also have rippling effect on other aspects of the family such as the health of the children. In many