unit 4 module 7 - interest rates Flashcards
Required Rate of return
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.
Yield
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.
Risk premium
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
risk free return
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
financial market
term that applies to any market place where buyers and sellers participate in the trade of assets such as stock, bonds, currencies
compound interest
make money on all accounts.
“make interest on the interest” and it accumulates
interest rate
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).
Annual percentage rate
total amount of interest you pay each year represented as a percentage of the loan balance.
simple interest
is determined by multiplying the daily interest rate by the principal by the number of days that elapse between payments.
Normal interest rate formula
in = i*n + rp + lp in= nominal interest i*n= the risk free cost of capital, inflationary expectations rp=risk premium lp=liquidity premium
structure of interest rate
the relationship between the interest on a debt contract and the maturity of the contract.
yield curve
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.
expectation hypothesis
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.
3 theories of term structure
- expectation hypothesis
- liquidity premium
- segmented market hypothesis
liquidity premium
long term rates reflect investors future interest rate assumptions + a premium for holding long term bonds.
segmented market hypothesis
“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
Cost push inflation
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
Demand pull inflation
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.
Cost of money
- opportunity cost
- time preference
- time value of money
interest rate
the percentage of an amount of money charged for its use per some period of time.
- vital tool for monetary policy
contractionary monetary policy
when economy is an a recession; increases the total supply of money in the economy more rapidly than usual.
-it lowers interest rates
expansionary monetary policy
is intended to slow inflation.
increases interest rate levels by expanding the money supply more slowly than usual or even shrinking it.
crowding out
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.