FINANCIAL ANALYSIS

Financial Analysis

Financial Analysis

TASK 1

The global financial crisis that began in 2007 is a financial crisis marked by a liquidity crisis and sometimes by solvency crisis at both banks of the States, and a credit crunch at the company level. The financial crisis began in July 2007; it has its origins in the bursting of price bubbles, the U.S. housing bubble of the 2000 and losses of financial institutions caused by the subprime crisis. This is the worst crisis of the history of stock exchanges, after that of 1873, arising from the banking crisis of May 1873.

The financial crisis of autumn 2008 amplifies the movement and causes a fall in the stock market and the bankruptcy of several financial institutions. To avoid a systemic crisis, governments must step in and save many banks which will cause a crisis of public debt. Moreover, it causes a recession in the whole world. The public finances have been heavily used to solve this crisis. The deficit has widened in many countries, after a decline in GDP of 2.2 % worldwide in 2009.

The above graphical representation shows the yield curve of treasury bills from 2007 to 2011. From the graph, it can be observed that the yield to maturity in comparison to the time to maturity for the year 2007 is highly fluctuating as compared to other years. In addition to this, for the year 2011, the yield to maturity is also low. The consequences of the 2007 financial crises include that the whole system was based on fake customers who did not pay their mortgages due to which the housing market got affected. In early 2007 the housing market collapsed and many customers stopped paying on their house worth more than today (Groppelli and Ehsan, 2008, 23-39).

The crisis began in summer 2007 because of subprime mortgages made to the American middle class. Normally, an individual who wishes to acquire an apartment can borrow based on salary and ability to repay. The Americans have created the subprime, you take what you want (even if the salary is not very high) but the house is collateral. Clearly, if you cannot repay, the bank gets the house and sells it. But when property prices are falling, banks are panicking; classic scenario, a borrower defaults addition, the bank decides to sell his house and all recovered (Groppelli and Ehsan, 2008, 23-39). But as property prices fell, the bank loses money on the sale. This is the subprime crisis, some banks that had been too used to this type of loan ended up in a critical financial situation and more than 2 million people find themselves ruined in the United States, unable to repay loans (Parker, 2010, 12-37).

The above graphical representation shows the forward rates in comparison to the time to maturity of treasury bills from 2007 to 2011. It can be observed that in the forward rates, there is a lot of fluctuation over the years. Specifically, in the year 2007 and 2008, there change in the forward ...