Programme Title Money Banking

Date
Translation by English department
Member Name DLER GHAFOUR RAHEEM
Member Number 17223MBAF

Section A:

The Money Market: The money market is a subsection of the fixed income market. We
generally term fixed income as a synonym for bonds. In fact, the bond is only one type of fixed income
security. The difference between the money market and the bond market is that the money market
specializes in debt securities of very short - term (debt maturing in less than one year). And called on
money market investments also cash investments due to the short maturity. Money market securities are
essentially IOUs issued by governments, financial institutions and large companies.
The participates on money market;
- Central banks
- Banks
- Commercial companies often purchase bankers' acceptance that the tender for payment to
suppliers abroad.
- Money market funds and retail and institutional
- Cash management programs
Functions of money market;
- Allow governments to raise funds
- Identify short-term interest rates
- Help for the implementation of monetary policy
- The transfer of large sums of money
- Transfer of the parties with a surplus of funds to the parties with a deficit
Money market instruments;
- Certificate of deposit; offered to consumers by banks, savings institutions , and credit unions.
- Repurchase agreements; short-term loans, arranged by the sale of securities to the investor with
an agreement to repurchase them at a fixed price on a specified date.
- Commercial paper - short-term notes issued by the Company at a discount from face value.
- Eurodollar deposits - Deposits made in US dollars in the bank or bank branch outside USA.
- Federal agency short-term securities issued by USA government-sponsored enterprises such as
agricultural credit system, banks and housing loans and the Federal Assembly of the Federal
National Mortgage.
- Federal funds - Interest-bearing deposits held by USA banks and other depository institutions at
the Federal Reserve.
- Municipal notes - Short-term USA notes issued by municipalities in anticipation of tax revenue
or other income.
- Treasury bills - short-term debt obligations of the national government that have been issued to
mature in three to twelve months.
The Bond Market;

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The bond is a debt security, When you buy a bond, you are lending money to the government,
municipal, enterprise and federal agency or other entity known as the source.
Includes the bond market in the first place for securities issued by government and corporate debt
securities, and facilitate the transfer of capital from savers to issuers or organizations that require capital
for government projects, business expansions and ongoing operations.

Components;
The issuer, Principal amount, specified interest rate paid to the issuer yearly, and the Date of
maturity.
Bond market types;
Corporate, Government & agency, Funding, Municipal, Mortgage backed, asset backed, and
collateralized debt obligation

Variables that Effect Value;

- Maturity;
 Short-term notes: maturities of up to 4 years.
 Medium-term notes/bonds: maturities of five to 12 years.
 Long-term bonds: maturities of 12 or more years.
- Redemption Features; Bond with a redemption provision usually have higher return to
compensate for the risk that the bonds might be called early.
 CALL Option: provisions that allow or require the issuer to repay the investors’ principal at a
specified date before maturity.
 PUT Option: option of requiring the issuer to repurchase the bonds, at a specified time, prior
to maturity.
- Credit Quality; Each of the agencies assigns its ratings based on an in-depth analysis of the
issuer's financial condition and management, economic and debt characteristics, and the specific
revenue sources securing the bond.
- Interest Rate; Fixed, floating or payable at maturity.
- Price; the amount pay for the bond, newly issued bonds will pay close to their face-value, traded
bonds fluctuate in response to changing interest rates;
 Bonds traded higher than their face-value are said to be sold at a premium
 Bonds traded lower than their face-value are said to be be sold at discount
- Yield; is the return actually earn on the bond based on the price paid and the
interest payment receive, two types of Yields;
 Current Yield: annual return on the dollar amount paid for the bond and is derived by
dividing the bond's interest payment by its purchase price
 Yield to Maturity: total return you will receive by holding the bond until it matures or is
called.
- Tax Status; some bonds offer special tax advantages, there is no state or local income tax on the
interest from US treasury bonds, and no federal income tax on the interest from most municipal
bonds, and in many cases no state or local income tax.
The Equity Market;
Most people like also to call it “the stock market”, it is get a collection of sellers and buyers are dealing
with shares which issued and traded through exchanges, one of the most dynamic areas in economy

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market since provides companies access to capital, also allow investors to have a portion of ownership
in a company to gain profits according to the company performance on the future.

Benefits of the equity/stock markets;

- Secure liquidity for the exchange of shares offered in the primary market through the secondary
market on the basis of supply and demand.
- Facilitate the collection of cash for the growth of companies; the method of issuing stock is the
easiest and most common ways to finance the company's expansion activities.
- Stimulate savings to invest; instead of saving money in banks with relatively low returns the ease
of investing in the financial market stimulates saver to put it and the different economic sectors.
- Help the government and businesses to raise money for development projects; possible that
governments are considering borrowing money to cover the costs of infrastructure projects and
facilitate financial market it through the bond offering in this market.
- Redistribution of wealth; given the breadth of the slide in financial markets , the gains help
narrow the gap between rich and poor.
- Stimulate corporate governance; because the financial market contribute to broaden the base of
shareholders , companies seeking to attract shareholders more to serve the objectives of
expansion this is the most important criteria to attract these investors efficiency of management
in achieving the goals of shareholders so the general trend that the shareholding companies
offered to the public or the so-called companies IPO needs that are available the greater
administrative efficiency of joint stock companies , which did not come to the public or the so -
called family business , where it is more committed to the company governance rules , the more
the confidence of the investors.
- The indices measure of economic performance; the general ndicator of stock prices in the
financial market is one of the previous indicators of events given that stock prices are a reflection
of expectations of economic events that will prevail in the future.

While the markets have become more integrated national security in recent years, there is still a
tremendous amount of fragmentation that brings benefit to be derived from international diversification
of financial assets. Monetary and fiscal policies differ between countries due to different economic
conditions. The country's economic policies have a direct impact on the securities traded in the country,
and they will behave differently from securities traded in another country with other economic policies
that are being implemented. Thus, it is not surprising that local factors were found to be more important
than international factors affecting the return of security . Similarly, affected by industrial activity
within the country also because of the economic policies of the country, and therefore companies in the
industry group itself, but from different countries, will not act necessarily is the same in all countries,
and we should expect the securities issued by these companies to behave alike .

The Foreign Exchange Markets;

Foreign exchange markets include the transfer of purchasing power from one currency to another, and
bank deposits in foreign currency, and the extension of credit denominated in a foreign currency, and
foreign trade financing, trade in FX Options and futures contracts.
Also called currencies exchange market, any country had its own national currency which traded with
another foreign currencies, the price of one currency in terms of the other is called the exchange rate. It

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is defined as the number of domestic currency units that are necessary to buy one unit of foreign
currency.

Participants can be classified in the foreign exchange market into five groups:
international banks, bank customers, non-bank dealers, brokers and FX, and central banks. Banks
provide basic international foreign exchange market.

Banks;
Approximately 100 to 200 banks all over the world make in the foreign exchange market, which
they stand ready to buy or sell foreign currency for their own account. These international banks
serve their retail customers, and the bank 's customers, in the conduct of foreign trade or making
international investment in financial assets that require foreign currency exchange.

Traders non-banking institutions;

are large non-bank financial, such as investment banks and investment funds, pension funds,
hedge funds, whose size and frequency of trades make it cost-effective to create a room of their
own deal to trade directly in the interbank market to meet the needs of foreign exchange .

Transactions between banks;

most are speculative or arbitrage transactions where market participants are trying to judge
correctly the future direction of the price movement in one currency against the other or try to
take advantage of temporary price differences in foreign currencies between competing dealers.

FX brokers;
match dealer orders to buy and sell currencies for a fee, but do not take a position themselves.
Traders use as an intermediary between banks in the first place to publish as soon as possible on
the currency price to many of the other dealers.

Central banks;
sometimes intervene in the foreign exchange market in an attempt to influence the price of its
currency against a major trading partners, or a country that " reforms " or " pegs " its currency
exchange. Intervention is the process of using foreign currency reserves to buy one currency in
order to reduce supply and thus increase its value in the foreign exchange market, or instead of ,
the sale of the single currency itself for foreign currency in order to increase the supply and
lower the price.
Section B:

The factors which determine short-term interest rates, and the role of banks in this:

 The Interest Rate; It is the rate of interest charged for the amount of money borrowed. Banks or
lending institutions usually have general guidelines for the rate they intend to charge. Borrowed
money from the bank on a short term basis (such as overdraft facilities) or on the basis of long-
term (bonds, mortgages or bank loans) and a different interest rate. Interest rates are determined

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 based on the forces of supply and demand; if rates increased the demand for what is on offer
from the funds will lead to higher interest rates and at the same time will reduce lending rates in
the economic circle. Affected by the interest rates the size of height and a decrease in capital
markets different, where interconnected financial markets as a result of the movement of funds
into these markets, the market is the financial characterized by prices usefulness rise attract the
capital in search of higher profitability standing, the supply of these funds, and this in turn leads
to a price reduction of any interest rate responsive to the forces of supply and demand, at the
same time expel low - interest markets of capital resulting in a decrease in the supply of a factor
in the high interest rate. As well as the consequent economic situation boom rise in interest rates,
where interest rates tend to rise in each period in which they need to finance economic
institutions in response to the increase in production if the economic recovery takes standing, the
demand for capital, which works to raise the price.

There are factors that affect the level of interest rates in the market:

- Monetary policy and intervention by the government;

One of the Government's strategies to control the flow of money into consumers is through
monetary policy. People will avoid borrowing money when interest rates are high. This in turn
will reduce the flow of funds and affect the revenues of the country, consumers will be spending
only if it is necessary. In order to stimulate growth, the government may offer lower interest
rates on borrowing that will attract the consumer at a later time to spend more borrowing. As a
result, when the growth rate increases so fast that the economy may overheat the face of the
problem, to have a government and then to reduce this by charging higher interest rates.

- Money Supply and demand;

Supply and demand is a key concept in the market economy. In general, the display indicates the
level of the amount of products or services that you can offer, while demand refers to the amount
needed for products and services. Supply and demand of money can affect interest rates. In the
United States, has taken the Fed move to manipulate the money supply through a process of open
market, through the purchase of large amounts of government security to increase the money
supply, thus lowering interest rates, or selling large amounts of government security to reduce
the money supply, which will increases in interest rates later.
On the other hand, is associated liquidity preference theory to demand money. Developed by John
Keynes, this theory explains how the supply and demand for money impact of interest rates. It states
that the demand for liquidity is determined by the deal, prudence and speculative motives. And therefore
the money supply reacts with the liquidity preference curve to determine the level of the interest rate
that the amount of money demanded is equal to the width.

 The inflation rates; With the passage of time, as the cost of products and services increase, the
value of money decreases. Therefore, consumers have to spend more money for the same
products or services that may cost less in the previous year . As for lending and finance sector,
borrowers may find it attractive to borrow now , but less attractive to the lender. The value of
money has decreased now compared to the time when they made their money. In order to
compensate for this loss, and lenders have to increase the interest rate.

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  General economic conditions; Economic situation has faced a series of mutations and retreats.
And the global economy was on the side recession since the past five years, with many
businesses closed. Banks are unable to provide the loan to reduce the rate because it has to cover
its costs.
Apart from the above, there are other factors such as political and financial stability and investor
demand for debt securities also affect interest rates. While the increase in interest rates helps the
consumer to save more than that, it is not good news for lenders and business because they lose revenue.
At the global level, and this also adversely affect the global economy. Among the most important results
that have been reached:
 There is a direct correlation with statistical significance between the interest rate and the
following factors: Index operating expenses, and loan index.
 And a weak positive relationship between the interest rate and the growth index and the inflation
index and market share.
 A significant inverse relationship between interest rate and equity index and the exchange rate
index.
 And a weak inverse relationship between the interest rate and the size of the bank worker.

The factors influence the structure of interest rates: It is understood that the interest rate is what
mainly determines your monthly payments. Basically, the interest rate is the amount would pay to a
lender in exchange for received loans, the money is needed to achieve an objective personally or on
organizational wise.
Setting of the interest rate;
In general, the higher of the loan duration, the more risk to the lender and, consequently, the greater the
interest rate. Of course it is not that simple as there are a number of other factors that make its
contribution in setting interest rates. Here lies the nitty-gritty on how to set the interest rate of the loan.
There are three main strong take over setting interest rates as an clear example in the United States;
- Central banks or (U.S. Federal Bank).
- Bond Market.
- Multiple strong economy.

U.S. Federal Bank;

if we look especially on USA as an clear example; U.S. Federal handles determine the monetary policy
of the United States of America as a whole. There was no federal banking system in the United States
since the year 1783 to 1913, but all this changed with the Federal Reserve Act, which was released in
1913. Apparently, is the central bank of the United States. But do not let the word " Fed " fool you - it is
not an institution or a federal government department.
U.S. Federal Organization enjoy privacy. There are 12 regional bank belonging to the American federal
system throughout the United States . In addition, the U.S. Federal continuously seeks to apply a variety
of monetary policies in a coordinated effort to counter the inflationary and deflationary pressures which
may be produced by changes in the domestic and global economy . Fed board meets eight times a year
and often, any changes in interest rates are announced only during one of these meetings. Federal
Reserve Board, which consists of 12 members is of controls on interest rates change benefits that
payroll from banks for lending money.

Here is clear explanation for the mechanism by which the Fed influences the interest rates;

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The bank will lend money to banks against mortgage securities business they own as collateral. Federal
substantially earns interest rates on loans given by the banks. This is called the discount rate. Banks or
borrowers after which they lend to consumers in exchange for payment of the interest rates that they
identify. Effects seem intuitive. The higher the discount rate received by the Federal Bank of the more
key interest rate because the bank wants to meet the minimum requirements of the costs as well as
profits. Many people think that when you hear the governor of the U.S. Federal changes being on the
basic interest rate, this automatically will affect interest rates. This is not so An increase or decrease the
interest rate may affect the basic line of bank credit Delivery (HELOC) but it will not affect the interest
rates. Interest rates also fluctuate according to the loan programs available to borrowers. (For more
information about loan programs on our site, as well, please visit the following link).
Bond Market;
Bond markets fluctuate on a daily basis is also a major determinant in the development of interest rates.
Indeed, one can guess with a high degree of accuracy, according to any moves to one of the bond
markets working days whether there will be changes in interest rates either up or down based on the
situation in the bond markets, especially bond for ten years. For further clarification, there are different
types of bonds that can affect interest rates, namely:
- Bond for 2 years.
- Bonds for 5 years.
- Bonds for 10 years.
- Bonds for 30 years.
If the bond market volatility led to an increase or decrease large in. Furthermore, the return rackets loans
(their opponent), they will turn to influence the interest rates offered to customers, which will be
reduced in the event of the aforementioned example. If you do not see a large bond price fluctuations
during normal working hours, the interest rate will not change. Every morning, the interest rates are
received in the office. Whether there is a need to modify the interest rate lenders bases they will make a
change on paper interest rate for the partners of brokers.

As I mentioned, the set interest rates depend on the yield in the bond market during any period of time.
Let's take the following example. If the bond price fell worth $100,000.00 to $95,000.00, the
accompanying interest rate will rise dramatically. This due to the high yield, the interest rates set
mortgage must cover in order to achieve high yield return to the lending institution. With all other
things remain unchanged, the fixed interest rates on mortgages will tend to rise.

Multiple strong economy.

There are many factors affecting the rate of loans. Rising interest rates may cause volatility in the stock
markets, which in turn affect the bond market. In fact, the bond and stock markets are aspects opposite
to the same currency. One cannot move without the other. If the value of the U.S. dollar rose, bond
prices fall; also they decline with lower oil prices. In general, while rising bond markets, the stock
market decline. In addition to this, if the economic data came better or worse than expected, it will lead
to the fluctuation of the value of the U.S. dollar pairs in the spot forex market, which in turn will affect
the bond market and then interest rates.

Some key economic indicators that may affect the economy and, consequently, interest rates are;
Durable goods orders, Sales of new homes, The trade balance for the United States, Unemployment
rate, Weekly jobless claims, and Modern Fed governor before Congress.

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Key economic indicators that could affect the bond markets associated with fluctuations are;
Consumer confidence, Retail Sales, Manufacturing activity, Industrial Production, Job growth, and
Inflation.

Section C:
The main set of connections between money supply and banks;
The Money Supply is defined money supply usually be a set of safe - haven assets that
households and businesses can use to make payments or to hold and short - term investments. Are
included, for example, the U.S. currency and balances held in current accounts and savings accounts in
many of the measures of the money supply.
There are many standard measurements of money supply, including the monetary base, M1 and M2.
The monetary base is defined as the sum of currency in circulation and reserve balances (deposits with
banks and other depository institutions in their accounts at the Federal Reserve). M1 is defined as the
sum of currency among the public and transaction deposits in depository institutions (which are
financial institutions that get their funds mainly through deposits from the public, such as commercial
banks, savings and loan associations, savings banks, and credit unions) . M2 is defined as M1 plus
deposits to savings deposits and small class (those issued in amounts of less than $100,000 ), and shares
of retail money market mutual funds.
Collapses and debt defaults lack the collapse of the money supply;
For loan defaults, for example, to reduce the money supply directly, the assumptions must affect the
accounts of the money supply. Once the loan is issued, however, and the money is in the system, and the
events that led to the subsequent default rarely have any direct impact on the various money measures.
Where it can affect the loan defaults money supply, however, is when the bank is a loss - shy on capital
- has to reduce new lending.
The monetary base may move reverse the consumer price index since 2001;
Claims that lack of growth in the monetary base deflation threatens to lack credibility. First, as
mentioned earlier, the data tend monetary base by a part of the dominant majority measure physical
currency in circulation outside the United States. Second, as shown in the graph, and the pattern of
annual growth in the monetary base may move reverse the pattern of growth in the consumer price
index since 2001, with little clear dampening effect on inflation.
There is no conflict between the weak growth in M1 and strong growth in M3 signals;
In times of low interest rates - especially negative real ( inflation-adjusted ) interest rates - there should
be a greater turnover in cash or in speed. The relative speed is also the largest of cash and checking
accounts (demand deposits) of term deposits, and thus will also be also higher for M1, M2, MZM and
display the money than it would be for M3. Strong annual growth witnessed in recent M3 it might just
be a high speed as inflationary and only the like M1 weaker times grow much higher speed. If Measure
M (M1 or M3) is in place, along with inflation and the growth of real gross national product, and then
measuring the velocity at the theoretical level make up the difference between disparate stories but told
him M1 and M3.
Broadest measure of money gives the most complete picture;
Recent data provide a good example of why the broadest measure of money supply available should be
used when assessing monetary conditions. Quite simply, you may changes to the levels of money
narrower measures reflect nothing more than the transfer of cash inside or outside the broader money
accounts, rather than reflecting the sudden shift in Fed policy.

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We consider that the annual M1 growth showed negative to flat for the past two years. Suddenly, in
June 2008, M1 jumped to 1.5% annual growth . Rather than a shift in Fed policy, which has been
deduced by a person rely solely on the M1, shows the relative growth of M1 has been at the expense of
some money shifted from M2 accounts for checking accounts in M1. In contrast, M3 pick up all the
changes in the system, which reflects the net changes of the system, not just changes to a subset of
accounts in the narrower M1 and M2.

In a related context, the broadest measure of money reflects the best and how much cash we believe the
participants have to spend. For this reason, the broadest measure of money is also the best indicator of
future inflationary pressures from the money supply.

The main influences on and the results of monetary policy:

Monetary policy decisions involve determining the interest rate on loans and overnight in the capital
market. And other affected interest rates in the economy through this interest rate to varying degrees, so
that the behavior of borrowers and lenders in the financial markets is affected by monetary policy (but
not only through monetary policy). The difficulty of the analysis is to adjust the effects of the individual
channels for external factors. The impact of such external factors - for example, may be superimposed
on the impact of central bank measures, and it is difficult to isolate the effects of monetary policy on
different variables for analysis purposes - supply and demand shocks, and technical progress or
structural change. Moreover, the time lag in the reaction of the real sector to the monetary measures
makes the analysis more difficult. Thus, monetary policy must be forward.

The individual transmission channels described in detail below:

Interest rate channel: the expansion of the money supply by the central bank through the feeding to
reduce the rates of short-term market through this channel. As a result, the real interest rate and lower
capital costs, and raise investment. In addition, consumers are saving less and choose current
consumption over future consumption. This, in turn, causes a claim to promote. However, it may cause
prices and wages to rise if fully utilized goods and labor markets this escalating demand .

Credit channel: channel credit actually breaks down into two different channels:
- Bank channel lending: central banks ' monetary policy decisions affect the commercial banks,
"the costs of refinancing; tend banks to pass the changes on to their customers. If you reduce the
cost of finance and investment and rising consumer spending, and contribute to accelerating the
pace of growth and inflation. However, in the wake of an increase in interest rates, and the risk
that some borrowers cannot repay their loans in a timely manner may greatly increase the banks
would not grant loans to these borrowers. As a result, borrowers will be forced to reduce planned
expenditures.
- Balance paper channel: monetary policy may have a direct impact on corporate policy, because
companies may borrow to improve return on equity as long as the return on debt - in effect
lending rate - less than the return on assets. Thus, the return on assets is the weighted arithmetic
mean of the return on equity and lending rate, where are weighted respectively led by shares of
stock and debt to total assets. Accordingly, lower interest rates improve the return on
shareholders' equity. For this reason, non-profitable installations may show a positive return on

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 equity. However, this may enhance the influence of interest rates on investment behavior, which
is referred to as the impact of the financial accelerator.

Exchange rate channel:

Expansionary monetary policy affects exchange rates because the local currency - denominated deposits
has become less attractive than foreign currency deposits when interest rates are reduced . As a result,
the value of local currency - denominated deposits decline relative to those denominated in foreign
currencies and deposits reduced the value of the currency. This decline makes domestic goods cheaper
than imported goods, causing the demand for domestic goods to expand and increase the overall output.
This channel does not work if there is a country with a fixed exchange rate, and on the contrary, the
more open the economy, and this channel is stronger. Exchange rate fluctuations may also affect
aggregate demand through the impact on the balance sheets of banks and companies, which include a
large share of foreign currency denominated debt of public budgets. Interest rate cuts involving the
devaluation of national currency raise debt from banks and companies that have contracts denominated
debt in local foreign currencies. Since usually assets denominated in local currency, and therefore does
not increase in the value of net impaired automatically. If the deterioration of the balance sheets, and the
risk that some borrowers cannot repay their loans in a timely manner may greatly increase the banks
would not grant loans to these borrowers. As a result, borrowers will be forced to reduce planned
expenditures.

Wealth Channel:
Monetary policy impulses transmitted also through the prices of assets such as stocks and real estate .
Fluctuations in the stock or real estate markets affected by monetary policy impulses have significant
effects on the overall economy. The effects of expansionary monetary policy of low interest rates make
bonds less attractive than stocks and lead to increased demand for the stock, which run to higher stock
prices. On the contrary, interest rate cuts make it cheaper to finance housing, causing property prices to
go up. There are three different types of asset price transmission mechanisms that involve:
- Effects 1. Investment: Tobin 's Q theory explains an important mechanism through which the
movements in stock prices could affect the economy. Tobin 's Q is defined as the market value of
the company divided by the replacement cost of capital. If Q is high, the market price of the
companies is high relative to the replacement cost of capital, and the new plant and capital
equipment cheap relative to the market value of the companies. Companies can then issue
securities and get a price for it dearly relative to the cost of facilities and equipment that may be
bought. And investment spending will rise because companies can now buy a relatively large
amount of new investment goods with only a small issue of the shares. Therefore, any reduction
in the interest rate rise to an increase in stock prices and reduce the cost of capital of companies
and thereby increase investment spending.
- Effects 2. Wealth: life cycle model Modigliani states that consumption is determined by the age
of resource consumers. These resources consist primarily of the life cycle of financial assets,
mostly stocks, and real estate. Cut interest rates consequent rise in the stock and real estate prices
and thereby increasing household wealth. At the same time, the life cycle of resource consumers
expansion, in turn, raise consumer spending and aggregate demand.
- Effects 3. Balance: the rise in the prices of stocks and real estate improves the balance sheets of
firms and households alike. High net worth translates into higher guarantees for lending to

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companies and households. This in turn increases lending, investment spending and thus increase
total spending.

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