assignment 8 interest rates and securities (Essay Sample)

Name Professor’s name Course Date Assignment 8 interest rates and securities Governments run a deficit when the government’s spending is higher than the tax collection. The government of the United States is one of the many nations that runs a deficit. So, how does the government of the United States finance this deficit? The government finances this deficit by borrowing. The federal government borrows by selling bonds and other financial assets (National Priorities Project). Financial assets are also referred to as securities. By buying bonds from the government, the buyer is lending money to the federal government, which the government is expected to repay to the lender with interest at a later date. The deficit in 2015 was 435 USD billion (McTeer). The government does not offer a standard interest rate on these securities because they are determined by government revenue and the government spending. The interest rate is agreed upon during the purchase of the bond. The investor buys a bond at a subsidized price and waits for it to reach its actual value at a later maturity date. The government offers fixed interest rates which offer lenders security of their investments (Money Advice Service). Unlike individual investors, banks can withstand a long maturity period at a low-interest rate since the interest and the safety of the investment are guaranteed. Liquid is cash, or assets that a bank can easily convert into cash to repay creditors and depositors (Farag, Harland and Nixon 201). Liquid, can therefore, refer to the assets that a bank holds as well as the sources of funding that the bank possesses (Farag, Harland and Nixon 205). Liquid helps banks to mitigate certain types of shocks. Liquid provides banks with a buffer during liquidity crises when other sources of funding dry up (Farag, Harland and Nixon 203). They are considered liquid since banks can use them to repay their debt. ...