unit 4 module 7 - interest rates

Question 1

Required Rate of return

Answer 1

the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project.
-commonly refers to the dividend, interest or return the investor receives from a security like a stock or bond, and is usually reported as an annual figure.

Question 2

Yield

Answer 2

commonly refers to the dividend, interest or return the investor receives from a security like a stock or bond, and is usually reported as an annual figure.

Question 3

Risk premium

Answer 3

minimum amount of money by which the expected return on a risky asset must exceed the known return on a less risky asset or risk free. in order to hold the individual to hold the risky asset over the risk free

Question 4

risk free return

Answer 4

the rate of return of an investment with a scheduled payment over a fixed periods that is assumed to meet all payment obligations
ex. saving is bank makes interest

Question 5

financial market

Answer 5

term that applies to any market place where buyers and sellers participate in the trade of assets such as stock, bonds, currencies

Question 6

compound interest

Answer 6

make money on all accounts.

“make interest on the interest” and it accumulates

Question 7

interest rate

Answer 7

the percentage charged by a lender for a loan.

-amount of regular return an investor can expect from a debt instrument such as a bond or certificate of deposit (CD).

Question 8

Annual percentage rate

Answer 8

total amount of interest you pay each year represented as a percentage of the loan balance.

Question 9

simple interest

Answer 9

is determined by multiplying the daily interest rate by the principal by the number of days that elapse between payments.

Question 10

Normal interest rate formula

Answer 10

in = i*n + rp + lp
in= nominal interest 
i*n= the risk free cost of capital, inflationary expectations
rp=risk premium 
lp=liquidity premium

Question 11

structure of interest rate

Answer 11

the relationship between the interest on a debt contract and the maturity of the contract.

Question 12

yield curve

Answer 12

shows the relationship between the interest rate (or cost of borrowing) and the time to maturity—known as the “term”—of the debt for a given borrower in a given currency.

Question 13

expectation hypothesis

Answer 13

the term structure of interest rates is the proposition that the long-term rate is determined by the market’s expectation for the short-term rate plus a constant risk premium.

Question 14

3 theories of term structure

Answer 14

1. expectation hypothesis
2. liquidity premium
3. segmented market hypothesis

Question 15

liquidity premium

Answer 15

long term rates reflect investors future interest rate assumptions + a premium for holding long term bonds.

Question 16

segmented market hypothesis

Answer 16

“theres no real relationship, rates are determined by supply and demand” However, because the supply and demand of the two markets are independent, this theory fails to explain the observed fact that yields tend to move together

Question 17

Cost push inflation

Answer 17

decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
-it contributes to an increase in the cost of raw materials or labor

Question 18

Demand pull inflation

Answer 18

is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers.
- can be cause by an expanding economy.

Question 19

Cost of money

Answer 19

• opportunity cost
• time preference
• time value of money

Question 20

interest rate

Answer 20

the percentage of an amount of money charged for its use per some period of time.
- vital tool for monetary policy

Question 21

contractionary monetary policy

Answer 21

when economy is an a recession; increases the total supply of money in the economy more rapidly than usual.
-it lowers interest rates

Question 22

expansionary monetary policy

Answer 22

is intended to slow inflation.

increases interest rate levels by expanding the money supply more slowly than usual or even shrinking it.

Question 23

crowding out

Answer 23

phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending. That means increase in government spending crowds out investment spending.