chapter 5 Flashcards
how are all mortgage interest rates quoted?
an annual percentage rate (APR) compounded semi-annually
what are nominal interest rates?
the interest rates that are quoted by banks and other financial institutions
what is real interest rate?
the nominal interest rate after it has been adjusted for inflation
how does the interest rate affect firms investment decisions?
since interest rates are used to discount future cash flows in NPV decisions, higher interest rates tend to reduce the set of positive NPV investments available to firms
do interest rates depend on the horizon being considered?
yes
what is a term structure of interest rates?
the relationship between the investment term and the interest rate
what is a yield curve?
a graph of the term structure of interest rates
in a growing economy, how do long-term and short-term interest rates react?
long-term rates are higher than short-term rates leading to an increasing yield curve
in a recession economy, how do long-term and short-term interest rates react?
interest rates are decreasing over time leading to an inverted yield curve
what do interest rates vary on?
the risk of the borrower
how will borrowers with a low risk of default be charged?
they would be charged a low interest rate
how will borrowers with a high risk of default be charged?
they would be charged a high interest rate
