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Assignment1 - BAFI3230 - Pham Nguyen Minh Vu - s4057059

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52 views4 pages

Assignment1 - BAFI3230 - Pham Nguyen Minh Vu - s4057059

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minhvu8a14
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Subject Name Financial markets and instutions

Unveiling Insights into Local Financial

Title of Assignment Markets

Location Hanoi Campus

Student’s Name and ID Pham Nguyen Minh Vu (s4057059)

Hanh Le
Lecturer’s Name

Date of Submission 05.04.2024

Word count 757 words

1. Introduction.
As a representative of the bank, I will investigate the French financial market and by deep
insight into the country’s yield curve. Based on the result, there are 3 main theories to
explain the shape of the yield curve. Therefore, we can be able to estimate the effect of
France’s financial market.

2/Task 1: Investigating the yield curve.

France Yield Curve - updated 2 April 2024.

It can be seen that the French yield Curve is the inverted yield curve, whose long-term
interest rate seems to be lower than the short-term one. There are three theories to express
the shape of the French yield curve.

i) Market Expectations Theory:


In fact, investors always aim to maximize their returns on their investments. This inverted
yield curve often refers to an economic recession. Therefore, investors are willing to pay
for long-term bonds with lower returns to reduce the risk as short-term bonds will
decrease significantly. As a result, investors seem to prefer long-term bonds with higher
price levels, leading to a fall in interest rates. In addition, the theory refers to the long-
term interest rate as the average sum of short-term interest rates. In this situation, France's
1-year bonds have an interest rate of 3.439%. This is much higher compared to the 10-
year rate and 20-year rate, which accounted for 2,906% and 3,292%.

ii) Expectation plus liquidity premium:


This theory refers to the situation of long-term bondholders, they might require a risk
premium as they are potentially facing a higher risk level than those who own short-term
bonds. Several events caused inflation, which potentially led to higher demand for risk
premiums in France. That is the main reason why long-maturity bondholders demand a
higher risk premium for their investments. This explains why the 10-year bonds have a
lower interest rate at 2.906% compared to the 20-year bonds, at 3,292%.

iii) Segmentation market approach:

This strategy plays a vital role in categorizing investor preferences and investment
horizons. Based on the shape of the yield curve, there are several investors segment
especially the ones who are interested in short-term investment. For instance, investors
with a low-risk appetite, who seem to be more careful with their investment, accept lower
interest rates.

In 2023/2024, France is prone to challenges potentially affecting the economy. Due to the
controversial immigration, labor shortages were considered one of the most challenging
problems that directly affected the whole country’s economy in 2024 (Osama Rizvi
2024). According to the European Labour Authority, France has faced labor shortages in
38 areas including construction, health care, IT, manufacturing, agriculture, and
engineering (Ngozi Ekugo 2024). This potentially affects the manufacturing,
construction, hospitality, and tourism sectors as the companies have to pay higher prices
for labor. If not, the output will be dramatically affected, leading to higher production
costs and inflation. If France continues to operate on rising borrowing costs and slowing
growth, then the economy will be highly damaged, which means that the yield curve will
witness a downward trend

3/ Task 2: Investigating the Interest rates.

An event that is considered an economic recession, which affects the interest rate in
France is the Ukraine war. In detail, the inflation rate continued to rise as a result of the
war. This is because energy, which Russia plays a crucial role in supplying to Europe,
was a main contributor leading to the high inflation rate in this country. This led to the
decline in the purchasing power of the French as well as business difficulties as the war
disrupted supply leading to the prices climbing up. (Charlotte de Montpellier 2023). To
ensure inflation in Europe, the ECB (Europe Central Bank) has to raise interest rates to
ensure the inflation rate at 2% in Europe (Europe Central Bank 2023). Therefore, the
existing bond price tends to drop as a result of rising interest rates.

It's more suitable if my customer focuses on short-term strategies as several issues within
the country might affect the economy, leading to higher interest rates. When the bank
shows signs of increasing interest rates, investors should consider short-term investments.
This is because the value of long-maturity bonds will decline. Therefore, investing in
long-term bonds potentially has a higher rate than later. Moreover, 10000 USD is not a
high amount of money in terms of investment. Therefore, customers may need returns as
soon as possible for reinvestment purposes. In this case, short-maturity investment will be
a great choice as they can quickly access their money to reinvest when the terms end,
while long-term investment is stuck at a lower rate.

Reference list:

1. Osama Rizvi (23 January 2024) France faces four major economic challenges in 2024,
Euronews.business website, accessed 2 April 2024.
Https://www.euronews.com/business/2024/01/23/france-faces-four-major-economic-
challenges-in-2024

2. Ngozi Ekugo (2024) France grapples with labour shortages in 38 occupations and needs
foreign talent, Neurametric website, accessed 2 April 2024.
https://nairametrics.com/2024/01/16/france-grapples-with-labour-shortages-in-38-
occupations-and-needs-foreign-talent/

3. Charlotte de Montpellier (28 Feb 2023) France: Inflation continues to rise while
consumption rebounds slightly, ING website, accessed 2 April 2024.
https://think.ing.com/snaps/france-inflation-continues-to-rise-consumption-rebounds-
slightly/.

4. Europe Central Bank (14 September 2023) Monetary policy decisions, European
Central Bank website, accessed 2 April 2024.
https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp230914~aab39f8c21.en.ht
ml#:~:text=The%20Governing%20Council%20is%20determined,rates%20by
%2025%20basis%20points.

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