Interest Rate

Financial institutions and markets create the mechanism through which funds flow between savers (fund suppliers) and investors (fund demanders). The level of funds flow between suppliers and demanders can significantly affect economic growth. Growth results from the interaction of variety of economic factors, such as the money supply, trade balances, and economic policies, that affect the cost of money – the interest rate or required return. The level of this rate acts as regulating device that controls the flow of funds between suppliers and demanders. In general, the lower the interest rate, the greater the funds flow and therefore the greater the economic growth and vice versa.

The interest rate or required return represents the cost of money. It is the rent or level of compensation a demander of fund must pay a supplier. When funds are lent, the cost of borrowing the funds is the interest rate. When funds are invested to obtain an ownership (or equity) interest, the cost to the demander is commonly called the required return. In both cases the supplier is compensated for providing either debt or equity funds. Ignoring risk factors, the nominal and actual interest (cost of fund) result from the real rate of interest adjusted for inflationary expectations and liquidly preferences – general preferences of investors for shorter-term securities.

In a perfect world in which there is no inflation and in which funds suppliers and demanders are indifferent to the terms of loans or investment because they have no liquidity preference and all outcomes are certain, at a given point in time there would be one cost of money – the real rate of interest. The real rate of interest creates an equilibrium between the supply of savings and the demand for investment funds.

Ex.7. Give the Ukrainian equivalents to the following.

Tax, taxation, taxable income, taxation brackets, tax avoidance, tax base, tax burden, tax evasion, tax exemption, tax-free, tax haven, tax holiday, taxman, tax relief, tax return, tax shelter, lump-sum tax, excise tax, heavy tax, payroll tax, to be out of action, to break down, (a) dead end, dud, to go dead, to go wrong, to be (or to fall) short of, to take the consequences, vicious circle, in the red, to make a loss, to pay the penalty (or price) for, to reach a stalemate, to bear fruit, the end product, in the black, to pay dividends, to pay (one’s) way, to pull off, to take effect.

Translate the following sentences into Ukrainian.

1. If discussion between the two companies bears fruit, as seems likely, the resulting merger will bring about far-reaching changes in our industry.

2. Whether we buy coal from Australia or Germany, either way the end product is the same: we’re importing coal.

3. Shareholders will be pleased to hear that, once again, the company’s year-end results show us strongly in the black.

4. The company’s investment in staff training schemes should pay future dividends in the shape of more efficient, more effective personnel.

5. Your department is not paying its way. Unless you make cuts and improve performance, you’ll have to go. I’m afraid that’s the price you pay for the privilege of being head of department.

6. I see from the financial press that our main competitor has won a major overseas contract. I wonder how they managed to pull it off.

7. Your breach of contract is so serious that it rules out any possibility of doing further business with you. Needless to say, the contract may be regarded as terminated, such termination to take immediate effect.

8. The computer is out of action at the moment, due to an electrical fault.

9. The photocopier has broken down again. It may be due to overheating, or it could be mechanical failure.

10. This balance sheet does not give enough information. We need a complete breakdown of the figures.

11. After five years without promotion, she felt she was in a dead-end job.

12. We had high expectations of your assistant, but it seems he’s turned out to be a dud on the job, in spite of all his qualifications.

13. We negotiated with them for months. They seemed interested at first and then they went dead on us – no replies to phone calls and faxes, no letters, nothing.

14. When carrying out this experiment, it is important to remember above all to be exact and go step by step and not cut corners. If you go wrong, the results can be expensive, and dangerous. So, better safe than sorry.

15. The company’s final results put it seriously in the red and a sharp fall in its share price has taken place.

16. The company would be a more attractive for investment without its loss-making overseas activities.

17. The young executive paid the penalty for spending too much time on business; his wife left him for another man.

18. At first sight, the new manager seemed able to cope with his responsibilities. Under the acid test of stress, however, his performance fell seriously short.

19. Taking risks also involves the consequences if things go wrong.

20. Companies continuing to produce goods in a dying market are creating vicious circle.

Ex. 8. Insert the missing words given below.

Finance, profit, stockholder, financial, mutual, bondholders, legislative, comply, interrelated, managers, constraints, legal, counterparts, activities, investors, trends, predominate, recession, keystone.

All participants in the world of … have goals. While these goals may be grounded in the economic concepts of maximization of … and maximization of satisfaction, they need to be much more specific to be useful in … decisions. The financial manager of a corporation, for example, generally considers maximization of … wealth to be the firm’s primary goal. Other competing goals, combined with … restrictions, tend to favour a goal of maximization of stakeholder wealth. Consequently, it is not unreasonable to say that …,employees, community residents, and even environmentalists need to interact with the corporation in the pursuit of … interest.

Institutional financial managers, like their corporate counterparts, are torn between personal goals and constituent goals. These managers also find limits on their flexibility from … constraints imposed by regulatory agencies. Similarly, government financial … are legally constrained in their actions and must work to maximize the efficiency of financial operations relative to these ….

Individual …, serving as their own financial managers, would love to be completely free to maximize their wealth. However, they quickly find that certain …, such as insider trading, are frowned upon by the US judicial system. It should be obvious that the goal of the individual investor and that of other financial managers are closely….

The principal … in finance today are corporate restructuring and the internationalization of finance. Restructuring was forced upon an unwilling corporate world by a … and an anemic economy recovery. Consequently, such words as downsizing or rightsizing entered the corporate vocabulary, and conservatism in financial matters has come to …. The internationalization process has developed gradually over time, but the increasing complexity of trade and the continuing growth of multinational corporations has made it a … of finance in the 1990s. Hence, all future financial decisions must now … with this new dimension.

Read the above text once again. Explain the meaning of the following words and phrases: financial decision, stockholder, legislative restrictions, regulatory agencies, individual investor, anemic economy recovery, downsizing, rightsizing.

Ex. 9. Open the brackets.