Chapter 8 Flashcards
what is CPI (consumer price index)
measures inflation from year to year
what is overnight rate
rate that FIs borrow from each other
what is operating band
helps bank decide what interest rate they’ll use for lending money to each other
what is the loanable funds theory
Interest rates reflect supply and demand for loanable funds
- Supply of money is low when interest rates are low
-Demand of money is high when interest rates are low
what does a normal yield curve represent (upward slopping)
considered normal because interest rates in the short term are less than interest in the long term
Why are interest rates higher for long term
because of risk and uncertainty
what does an inverted yield curve represent (downward slopping)
indicates high inflation, doesnt stay like this for a long time, you pay more interest for one day compared to 30 years
- high demand for long term since its cheaper, this increases price and interest = resulting in normal curve
what does a flat yield curve represent
unknown situation, will be like this for a while
what is real interest rate and how to calculate
interest you earn after inflation
real = nominal - rate of inflation
what is nominal
basic rate advertised by bank
what is the re-pricing model
the difference between the rate sensitivity of each asset and the rate sensitivity of each liability (RSA-RSL)
FIs have both repriceable/variable liabilities and assets , give example
repriceable liability: chequing acct
repriceable asset: line of credit (if interest rates go up, so does interest for borrower)
When does the profitability of a bank get affected in terms of interest rates
1) when interest rates go up and down immediately on the repriceable
2) mismatch in securities, interest risk
what does a negative gap mean
liabilities> assets (reinvestment risk)
what does a positive gap mean
assets>liabilities (refinance risk)
