Determinants of Interest Rates Flashcards
Nominal interest rates are
The interest rates actually observed in financial markets. They are used to determine fair present value and prices of securities.
Real interest rates represent
additional purchasing power required to forego current consumption
Loanable funds theory
explains interest rates and interest rate movements.
Views level of interest in financial markets as a result of the supply and demand for loanable funds.
Determinants of Household Savings
Interest rates and tax policy Income Attitudes about saving versus borrowing Credit availability Job security
Determinants of foreign funds invested in the US
relative interest rates and returns on global investments
expected exchange rate changes
safe haven status of US investments
foreign central bank investments in the US
Determinants of Interest Rates for Individual Securities
Inflation Real Interest Rate Default Risk Premium Liquidity Risk Premium Special Provisions (taxability, convertibility, callability, covenants) Term to Maturity
Unbaised Expectations Theory
long term interest rates are geometric averages of current and expected future short-term interest rates.
Liquidity Premium Theory
Long-term interest rates are geometric averages of current and expected future short term interest rates plus liquidity risk premiums that increase with maturity.
Market Segmentation Theory
Individual investors and FIs have specific maturity preferences
Interest rates are determined by distinct supply and demand conditions within many maturity segments
Investors and borrowers deviate from their preferred maturity segment only when adequately compensated to do so
Implied Forward Rates
A forward rate (f) is an expected rate on a short- term security that is to be originated at some point in the future
