Book: Financial Markets 2 Flashcards
Doea the financial system matter
Yea, and a financial crisis may have greave macroeconomic consequences
What are nominal interest rates
Interest rates expressed in currency
What is real interest rates
Interest rates expressed in terms of a basket of goods
What is the equation for real interest rate
1+r(n) = (1+i(n))*P(n)/P(n+1)
What is the function to calculate the expected inflation for the next year
Inflation (e) (n+1) = (P(n+1) - P(n))/P(n)
How can you calculate the real interest rate using inflation
(1+r(n)) =(1 + i(n))/(1+inf(n+1)(e))
What approximate equation may be used to calculate real interest rate
r(n) ~ i(n) - inf(n+1)(e)
real interest rate is about the interest rate minus expected inflation for the next period as long as nominal interest rate and inflation is less than 10%
What implications does r=i-inf have
When inf is zero r=i, i is typically larger than inf as r tends to be positive, the higher inf the lower r
What is the zero lower bound for real interest rate
Negative expected inf
What is bond maturity
The time it takes for them to pay back
What is a risk premium when it comes to bonds
The loan giver requires a higher interest than what is decided by the fed because there is a risk that the loner does not pay back
What factors determine the risk premium of a bond
The probability of default and the risk aversion of the bond holder
How do you calculate the risk premium
X = (1+i)*p/(1-p)
p is for probability of default
Why might the rate at which companies can borrow be much higher than the federal policy rate
Because the banks are more risk averse during an economic low turn
What is another name for checkable deposits in banks
Demand deposits
