Microeconomics Essay Example | Topics and Well Written Essays - 500 words - 13

Microeconomics - Essay Example the loss incurred the bank has to pass forward the effect of this incident to its other customers which are charged higher interest rates on their future loans and their current money deposits receive a lower interest rate return. The money supply of the banks is also diminished due to event of a loan investment that is not recovered. Corporations in America follow similar financial decisions to individuals concerning their outstanding debt. Whenever market conditions are favorable corporations look for ways to refinance their debt. The difference between a corporation and individual is that companies utilize different mechanism to achieve refinancing. Corporate debt can be refinanced by utilizing a bond mechanism. A bond is commercial paper sold in denomination of $1000 to individuals or business which allows the corporation to raise money. The bonds have a fixed interest rate called the coupon rate. If market conditions changed corporation can issue a set of bonds at lower interest rate in order to eliminate its outstanding bonds and pay less money in the long run. Downgrading of debt occurs when the chances of recovering the outstanding debt diminishes because the debtor has not been paying their payment or time. If a loan goes beyond 90 days without a payment being received the debt is said to have gone in default. At this time the chances of collecting the money goes does down significantly. From the perspective of an outsider these financial assets of the bank represent a downgraded asset. The $700 billion bailout plan targeted these types of downgraded assets which the government would buy up to create greater liquidity in the banking system. Another way downgrading of debt occurs is when corporate debt such as bonds are downgraded by agencies such as Moody’s. Moody’s has a system which gives a grade to the commercial paper issued by banks and governments. If the organization is having financial problems the grade of their outstanding debt is