PROVISIONAL TITLE
An analysis of the effects of interest rate on investment in Zimbabwe (2009-2015).
BACKGROUND AND PROBLEM STATEMENT
Since the adoption of a multicurrency system in Zimbabwe in 2009, the Central Bank’s power to control or influence interest rates structure disappeared. It is the monetary policy instruments that give the direction of interest rates in an economy. The broad money supply is neither an option because of the simple reason that the Central Bank cannot influence that anymore due to the multicurrency regime that the country embarked on in 2009.
High demand for working capital across all sectors of the economy is evident. Business needs to retool, innovate, reposition and possibly win back the market share that
…show more content…
The basic definition of an interest rate is simply the cost of borrowing money. It is the cost associated with acquiring credit, whether buying a car, getting a mortgage, or taking a vacation. Interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources. It is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha&Acha …show more content…
Investment depends upon the rate of interest involved in getting funds from the market by investors, while economic growth to a large extent depends on the level of investment. If interest rate is high, investment is at low level and when interest rate falls, investment will rise.
Jorgenson (1963), in his paper “Capital Theory and Investment Behavior”, provided the effect of real interest rates on investment spending in an investment equation. He derived the desired stock of capital as a function of real output and the opportunity cost of capital. In this approach, a representative firm maximizes the present value of its future cash flows. The desired capital stock is directly related to output and inversely related to the cost of capital. A decrease in the real interest rate lowers the opportunity cost of capital and, therefore, raises the desired capital stock and investment
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
The seventh chapter asks, ‘Why Do Central Bankers Have Power over the Economy?’. In this chapter, the authors evaluate the power of central banks during normal and tough times and question whether central banks ‘have the power to control something as huge as the macroeonomy’ (p.74).
Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies...
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
Economic growth focuses on encouraging firms to invest or encouraging people to save, which in turn creates funds for firms to invest. It runs hand-in-hand with the goal of high employment because in order for firms to be comfortable investing in assets such as plants and equipment, unemployment must be low. Hereby, the people and resources will be available to spur economic growth.
The last assumption is that savings will equal the investment which will lead to equilibrium; however, Classical theorist are realist and know this will not always happen, thus, they believe the flexible interest rates will help with the equilibrium.
Risk free rate refers to the yield on high quality government bonds. The number of models and theories that are based around the concept conveys its importance in finance. They include risk premium and models such as the capital asset pricing model. Like most models it is held to a set of assumptions. Theoretically there should be zero risk involved to the investor. Below I will discuss risk free rate and its importance on finance (Damodaran, 2010).
MONEY SUPPLY GROWTH AND MACROECONOMIC CONVERGENCE IN ECOWAS by WEST AFRICAN MONETARY AGENCY (WAMA) is a writes up similar to this topic. Where the relationship between money supply major macroeconomic indicator where investigated for countries in West Africa includi...
The changing business environment- highly competitive "global" product markets, an increasingly rapid advancements in Information and Communication Technology (ICT) and increasing capital intensity of production.
Capital markets are markets "where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income)" (Woepking, ¶3). The two major capital markets are stock and bond markets. Capital markets promote economic efficiency by moving funds from those who do not have an immediate need for it to those who do. Individuals or companies will put money at risk if the return on the intended investment is greater than the return of holding risk-free assets. An example of this would be those that invest in real estate or purchase stocks and bonds. Those that invest want the stock, bond, or real estate to grow in value or appreciate. An example of this concept would be if an individual or company invested an amount saved over the course of a year. While investing may be riskier, these individuals hope that the investment will yield a greater return than leaving the money in a savings account drawing nominal interest. In this example the companies that issue the stocks or bonds have spending needs that exceed their income so the company will finance their spending needs by issuing securities in the capital markets. This is a method of direct finance because the "companies borrowed directly by issuing securities to investors in the capital markets" (Woepking, ¶5).
...crease unemployment. Investors are an important factor to consider because without investment the economy will decline. To sum up, investment solves vital economic problems and is a nourishing factor to the economy. Investors desire to invest in a capitalist economy because they make their own decisions not like communist economy and they set their own prices and they are not restricted to minimum wages.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
In order for any country to survive in comparison to another developed country they must be able to grow and sustain a healthy and flourishing economy. This paper is designed to give a detailed insight of economic growth and the sectors that influence economic growth. Economic growth in a country is essential to the reduction of poverty, without such reduction; poverty would continue to increase therefore economic growth is inevitable. Through economic growth, it is also an aid in the reduction of the unemployment rate and it also helps to reduce the budget deficit of the government. Economic growth can also encourage better living standards for all it is citizens because with economic growth there are improvements in the public sectors, educational and healthcare facilities. Through economic growth social spending can also be increased without an increase of taxes.
Economic growth also play a role in reducing debt to GDP ratios. Therefore, money can be spent on protecting the environment. With higher real GDP a society can dedicate more resources to promoting recycling and the utilization of renewable resources investment. Economic growth encourages investment and therefore encourages a virtuous cycle of economic growth.
"Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per period of time, usually one year" (Getobjects.com, 2004). An interest rate is a very important factor in all financial decisions. The two types of interest rates are simple and compound (Brealey, Myers & Marcus, 2003). A simple interest rate for example, occurs when a person borrows money from a lender and he or she will have to pay the lender a fee, this fee is the simple interest rate (Brealey, Myers & Marcus, 2003). Simple interest is normally used for a single period of less than a year, such as 30 or 60 days [simple interest = p x i x n] (Getobjects.com, 2004). For examp...