Topic 02 : Meaning of Interest Rates

Question 1

What is the importance of interest rates?

Answer 1

1. consumption and saving decisions for householders 2. Investment decisions for businesses

Question 2

How are interest rates measured?

Answer 2

Yield to Maturity

Question 3

How do you evaluate a bond?

Answer 3

Rate of return

Question 4

How does inflation impact on interest rates?

Answer 4

Nominal v real interest rate

Question 5

What is a discount bond?

Answer 5

A discount bond is a bond bought at a price below its maturity value. Example: bill

Question 6

What is a simple loan?

Answer 6

A simple loan is a loan that is repaid to the lender at the maturity date with an additional interest payment. Example: money lender

Question 7

What is a coupon bond?

Answer 7

A coupon bond pays a bondholder a fixed interest payment every period until the maturity date, when the principal is repaid. Example: bond

Question 8

What is a fixed-paymenet loan?

Answer 8

A fixed-payment loan is a loan that is repaid by making the same payment every period Example: mortgage