interest rate

Examples of interest rate in the following topics:

• The Interest Rate Risk

  • Interest rates became volatile during the 1980s, forcing banks to become more concerned with interest-rate risk.
  • If the interest-rate sensitive liabilities exceed the interest-rate sensitive assets, then rising interest rates cause banks' profits to plummet, while falling interest rates cause banks' profits to increase.
  • If the interest-rate sensitive liabilities are less than interest-rate sensitive assets, subsequently, increasing interest rates cause banks' profits to soar, while declining interest rates cause banks' profits to plummet.
  • If the interest-rate sensitive liabilities equal the interest-rate sensitive assets, then fluctuating interest rates do not affect bank profits.
  • If the interest rate rises, subsequently, the banks increase the interest rate on the loans.

• Macroeconomic Factors Influencing the Interest Rate

  • Taylor explained the rule of determining interest rates using three variables: inflation rate, GDP growth, and the real interest rate.
  • An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
  • The interest rates are influenced by macroeconomic factors.
  • In other words, (πt - π*t)is inflation expectations that influence interest rates.
  • Taylor explained the rule in simple terms using three variables: inflation rate, GDP growth, and the equilibrium real interest rate.

• Comparing Interest Rates

  • It provides an annual interest rate that accounts for compounded interest during the year.
  • The Fisher Equation is a simple way of determining the real interest rate, or the interest rate accrued after accounting for inflation.
  • To find the real interest rate, simply subtract the expected inflation rate from the nominal interest rate.
  • The nominal interest rate is approximately the sum of the real interest rate and inflation.
  • Discuss the differences between effective interest rates, real interest rates, and cost of capital

• The Fisher Effect

  • We only discussed nominal interest rates.
  • We did not adjust the nominal interest rates for inflation.
  • Investors and savers are concerned about the real interest rate because the real interest rate reflects the true cost of borrowing.
  • It equals a geometric average of the expected inflation rate and real interest rate.
  • We calculated the real interest rate in Equation 3.

• Term Structure of Interest Rates

  • Term structure of interest rates is the interest rates differ by maturity if the securities have identical risk, same liquidity, similar information costs, and the same taxes.
  • Second, interest rates move together, so the yield curve normally shifts upward or downward as the interest rates change.
  • If you decide to hold a two-year bond, the interest rate must be 10% because the interest rate will be 9% for the first year, and you believe interest rates will increase to 11% for the second year.
  • Interest rate on a long-term bond equals the average of the short-term interest rates expected to occur over the life of the long-term bond.
  • Term Structure of Interest Rates for U.S.

• Interest Rate Levels

  • An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender.
  • An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender.
  • Changes in interest rate levels signal the status of the economy.
  • If interest rates are unchanged, an increase in the level of aggregate demand will follow.
  • Because there is an excessive demand for real balances, the interest rate rises.

• Price Risk

  • Interest rates and bond prices carry an inverse relationship.
  • Bond price risk is closely related to fluctuations in interest rates.
  • Fixed-rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest rates rise.
  • When the market interest rate rises, the market price of bonds will fall, reflecting investors' ability to get a higher interest rate on their money elsewhere — perhaps by purchasing a newly-issued bond that already features the new higher interest rate.
  • On the flip side, if the prevailing interest rate were on the decline, investors would naturally buy bonds that pay lower rates of interest.

• Calculating Values for Different Durations of Compounding Periods

  • Sometimes, the units of the number of periods does not match the units in the interest rate.
  • For example, the interest rate could be 12% compounded monthly, but one period is one year.
  • But suppose you want to convert the interest rate into an annual rate.
  • Remember that the units are important: the units on n must be consistent with the units of the interest rate (i).
  • The effective annual rate for interest that compounds more than once per year.

• Differences Between Real and Nominal Rates

  • In the case of a loan, it is this real interest that the lender receives as income.
  • If the lender is receiving 8% from a loan and inflation is 8%, then the real rate of interest is zero, because nominal interest and inflation are equal.
  • Where r is the real rate, i is the inflation rate, and R is the nominal rate.
  • The real rate can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate: 1 + i = (1+r) (1+E(r)), where i = nominal interest rate; r = real interest rate; E(r) = expected inflation rate.
  • The relationship between real and nominal interest rates is captured by the formula.

• Calculating Present Value

  • Calculating the present value (PV) is a matter of plugging FV, the interest rate, and the number of periods into an equation.
  • Finding the present value (PV) of an amount of money is finding the amount of money today that is worth the same as an amount of money in the future, given a certain interest rate.
  • Interest Rate (Discount Rate): Represented as either i or r.
  • One area where there is often a mistake is in defining the number of periods and the interest rate.
  • The problem may talk about finding the PV 24 months before the FV, but the number of periods must be in years since the interest rate is listed per year.