EAB-chp6 (option1report)

8/3/2019 EAB-chp6 (option1report)

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Reported by:Alianah A. PacmaMa. Ruby Abuan


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Table 6-1 presents the uses, or demand, for credit in the United States. Thetable is split into 3 sections:

Part A distinguishes between official borrowing by the U.S. governmentthrough the Treasury and government agencies, and private domestic

borrowing by state and local governments, households, and nonfinancialbusinesses.


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Table 6-1

Part B includes the main borrowing sectors---state and localgovernments, households, and nonfinancial businesses.


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Table 6-1

Part C details the types of foreign net borrowing in theUnited States.


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The U.S. government borrows directly through theissuance of Treasury bills (with maturities of less than 1year), notes (with maturities of 1 to 10 years), and bonds(maturities of over 10 years).

These are direct borrowing backed by the fullfaith and credit of the U.S. government.

As such, they have been the most creditworthy debtinstruments in the world, although there has been anenormous increase in U.S. government borrowing anddebt since 1980


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There are also a number of independent federalagencies;for instance,- The Government National Mortgage Association

(Ginnie Mae), the

- Federal National Mortgage Association(Fannie Mae), the

- Federal Home Loan Mortgage Corporation(Freddie Mae), and the

- Student Loan Marketing Association (Sallie Mae),which have independent borrowing authority. As such,their borrowing does not affect the deficit, and they arenot backed by the full faith and credit of the U.S.

government.


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Long-term borrowing in the form of debt capital

instruments can generally be regarded as having a

maturity of beyond 1 year.


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Tax-exempt obligationsare most often issued by stateand local governments referred to as municipal ormunis and as the term implies are exempt from

taxation at all levels. As a rule, state and localgovernments have less freedom to resort to deficitfinancing than the federal government, and so more oftheir debt is to finance specific projects, such as bridges,

turnpikes, or college dormitories.


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State and local governments do littleshort-term

borrowing, but when they do, it is usually in the form of

short-term notes (with maturities from 1 month to 1 year)in anticipation of funds from either general tax revenues

or bond proceeds.


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Householdslong-term borrowing mainly consists of

home mortgage loans, where the debt is secured by the

homeitself.


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Consumer credit refers to four types of short-termborrowing:

automobile loans(the average auto loan has a maturity

of 4 to 5 years),

revolving credit(for instance, credit card loans),

mobile home loans, and

other creditextended by banks, finance companies,retailers, and so forth.


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Nonfinancial businessesconsist of corporations, farms,and unincorporated, nonfarm businesses.

Corporationstend to have the most credit options. For long-

term credit, they can issue their own bonds, assuming theircredit rating is high enough. Corporation can also take out a

mortgage to acquire or maintain real property.

For short-term credit needs, large corporations often issue

commercial paper, which are short-term negotiable securities(usually with a maturity of 30 days, but no more than 270

days) that can be sold in secondary markets. In addition,

corporations may borrow from banks and are likely to avail

themselves of trade credit.


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4 Basic Components of Interest Rates:

1. Maturityor liquidity preference refers to the fact that

the longer repayment is deferred, the Higher the interestrate payment must be to reward the lender for forgoing

the use of the money.

2. Default risk premium is the payment the lender

receives against the possibility that the loan will not be

paid back at all (or on time).


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3. Tax treatment is especially important for state and

local government obligations, munis. The federal

government assists the state and local governments by

exempting their interest payments from taxation.


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4. Inflation expectations premiumis in many ways the

most important component of interest rates. Inflation,

the loss of purchasing power, is the greatest enemy of

interest-bearing wealth.

If the liquidity premium is a payment for the basic

loss of liquiditythe lenders loss of the use of the

moneythen inflation exacerbates this loss.

EAB-chp6 (option1report)

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