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OFF BALANCE SHEET FINANCING This research examine

This research examines three types of innovations in financial intermediation that may be generally categorized as off balance sheet financing. The three types of financial innovation examined are interest rate swaps, debt/equity swaps (non consolidation), and pension fund manipulation (post retirement benefits).

Major changes in the financial markets in the 1980s prompted the development of financial innovations. These changes were the level and volatility of interest rates, technological progress in computers and communications, changes in governmental regulation of business activity, and tax law changes.1

The financial innovations that developed may be classified as product, process, and organizational in character.2 The types of financial innovation considered in this research are primarily organizational in character.

An interest rate swap is a transaction in which two parties swap interest payments for a predetermined period.3 The credit risk associated with an interest rate swap is less than that for a comparable debt contract because no principal changes hands, and interest payments are made on a net basis. The practical

1Tim S. Campbell, "Innovations in Financial Intermediation," Business Horizons, 32 (NovemberDecember 1989): 70.

3Larry D. Wall and John J. Pringle, "Alternative Explanations of Interest Rate Swaps," Financial Management, 18 (Summer 1989): 59.effect of an interest rate swap is to alter the repricing interval of a firm's debt.4

Although the effects of interest rates on different sectors of the economy tend to vary, interest rates do have the capacity to substantially affect economic outcomes.5 Monetary and fiscal policies affect the economy in a variety of ways. Further, a single policy action may produce conflicting results. The Federal Reserve can exert a significant influence on the level of interest rates through the development and implementation of monetary policy. Through manip...

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OFF BALANCE SHEET FINANCING This research examine. (1969, December 31). In LotsofEssays.com. Retrieved 09:25, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1700140.html