Business Math: Understanding the Prime Interest Rate and its Effects on the Economy and Financial Institutions

Business Math.

Why do you think the Federal government adjusts (raises or lowers) the prime interest rate? What do you think are some of the effects of the adjustments? Why do you think bankers, investors, lenders and consumers closely follow the movement of the prime interest rate? What are some of the implications of a change in the prime rate?

The Federal government adjusts the prime rate in order to control the level of money supply in the country. For example, if the government wants to increase the supply of money in the country, it lowers the prime interest rate. In such a case, the “price” of money decreases and thus more companies and individuals are able to take advantage of it. The level of prime rate also has a direct influence on the rate of inflation in the country.

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All of the financial institutions follow the movement of the prime rate because first, they need to adjust their rates for their clients, and second, they can get thus information about the climate and financial situation in the country, as well as the possible forecasts for its development. The implications of a change in a prime rate are the possible consequences of the change. The government needs to ensure that the actions it takes in this case make the economic situation in the country more favorable.

`Annuities are not a wise choice for certain investors`. Do you agree with that statement? Write a brief paragraph explaining why or why not.

I agree with the statement because annuities can be both wise and not wise for various groups of investors. For example, for aggressive investors they are not the best investments because they only give the fixed amount of return to the investor. Aggressive investors take large amounts of risk and thus they make investments into those assets, which can give maximum return during years. However, for other investors annuities can be very good investments.

For example, pension funds and insurance companies can invest into annuities in order not to take great risks. They do not seek to make aggressive investments and make large profits. These companies are looking for ways of allocating their assets in the most reliable funds. Annuities provide fixed profits, which are perfect solutions for this type of investors.

During the meeting, several employees remark that some of the clients have asked advice about offering a trade discount for purchases in wholesale quantities. What do you tell them? Should they offer trade discounts? Is your response the same for all your clients? Explain your rationale.

In my opinion, trade discounts need to be offered to clients in the beginning. The company is seeking to increase its market share and target a large number of small businesses. By offering discounts for purchases in wholesale quantities, more consumers could get attracted to the services which the company offers and in a long run, the revenues would increase even though some discount was given to customers. In future, when the number of customers of the company will increase rapidly, discounts could be given only to those customers who stay with Financial Outsourcing for a relatively long period of time. However, in the beginning it is necessary to apply all of the most efficient marketing tools to attract new customers.

Bibliography.

1. Dunning John H. Governments, Globalization, and International Business. Oxford University Press, 1999.
2. Tamir Agmon. Technology Transfer in International Business. Oxford University Press, 1991.

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