2/19 lecture Flashcards
interest is
a charge for borrowed money
interest rate is
the annual charge as a percentage of the borrowed amount
yield is
the promised interest rate associated with an investment
return is
the actually realized interest rate associated with an investment
how is interest rate relevant to macroeconomics
markets care because all modern economies rely on debt to finance economic opportunity
what is one of the Feds main tools to influence the broader economy
raising/lowering interest rates
zinseszins is
compound interest
what is compound interest
interest is not only earned on the initial deposit, but on previsouly accumulated intrest as well
what is APR
rates you pay for borrowing
administrative is
rates governments set
amrket rates are set by
supply and demand
intra year compiunding
is compounding but at different rates, such as monthyly or quarterly
APY is the
annual rate you receive depending on the compounding
under intra year compounding, does the original interest rate capture what is actually earned over the course of the year
no. The higher the comp. Frequency, the higher the APY and thus the higher the future value FV.
what does APR capture
actual interest rate borrowers pay on their borrowing
is APR or APY higher
APR
what is liquidity
the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
what is interest on reserves
the ratio paid by the Fed to banks who hold reserves
what is discount rates
the rate paid by banks for loans from fed
makret rates are determined by
the market
Fed funds rate are
the rate paid on overnight loans between banks
US treasury rates are
the rates paid by the US government on its debt
commercial loan rates are
the rate paid by furms to finance ther operations
mortgage rates
the rate paid by households to finance real estate
prime rate is
a base rate used by banks to price other loans
what happens to market rates when Feds change administrative rates
they change (everyone pays attention to Feds)
maturity on yield curve is
point in time when a debt instruments final payment is due
yield curve is
annualized US treasury yields as a function of their maturity
long term rates are
long term rates that can be thought of as an average across expected future short term rates
real interest rate
turns any dollar-saved today into purchasing power adjusted number of dollars in the future
what is nominal interest rate
money interest rate turns any dollar saved today into a predetermined number of dollars in the future
unlike nominal interest rate, real interest rate is not predetermined, why?
because you can not predict inflation (even the Feds cant)
what do interest rates play a crucial role in determining
observed allocations both at the micro and macroeconomic level
insights when saving in regards to interest rates
1) appreciate the power of compounding
2)consider both nominal and real interest rates
3)keep part of your wealth accessible by way of high-yield savings or money market accounts
