Inflation and Interest Rate Flashcards
Is defined as the continuous rise in the general price level of goods and services
Inflation
How to measure Inflation
Consumer price index (CPI)
Producer price index (PPI)
GDP deflator
which is the equivalent of the CPI on the supplier side
Producer price index (PPI)
It is derived by getting the weighted average of the price indexes used to “deflate” the GDP.
GDP deflator
Causes of Inflation
Demand-pull inflation
Cost-push inflation
example of Demand-pull inflation
pandemic (face mask)
example of Cost-push inflation
oil
Factors that cause higher production cost
Higher prices of raw materials and commodities
Higher food prices
Higher taxes
Effects of Inflation
Purchasing power
Cost of borrowing
Consumer spending
Unemployment
Economic growth
is a situation of very high and ever-increasing inflation rates.
If left unchecked, inflation can have damaging effects as witnessed time and again throughout history
Hyperinflation
Responsibility to keep inflation in check.
Central bank
Level of money supply
Interest rate
is the rate of return and the cost of borrowing
Interest Rate
Nominal Rate vs Real Interest Rate
Nominal interest rate is the rate typically quoted on investments or the rate stated on loan contracts. Real Interest Pertains to the rate adjusted for inflation
Types of Interest Rate
Institutions
Term of a loan
Flexibility of the rate
Determinants of Interest Rate
Credit risk of the borrower
the higher the credit risk of an individual or company, the higher the interest rate on loans.
Credit risk of the borrower
Investment grade
BBB - by S&P
BBB - by Fitch and Baa3 by Moody’s or higher
Credit ratings: positive or negative based on a tier-type system
More liquid assets often get lower interest rate.
Refers to the probability that a debtor or borrower cannot meet short term obligations.
Liquidity risk
Refers to the availability of cash and other short- term assets that are easily convertible to cash.
Liquidity
is a financial security that represents debt.
Bonds
Bonds issued by public or private firms
Corporate bonds
bonds Issued by the government
Treasury bonds or T-bonds
Measures the aggregate interest a bondholder will receive if the bondholder hold on to the bond until maturity.
Yield
