chapter 6 notes

chapter 6 notes - BUS 320 Chapter 6 Interest Rates 1...

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1 BUS 320 Chapter 6 Interest Rates
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2 Interest Rates The interest rate is the price lenders receive and borrowers pay for debt capital. There is no single interest rate.
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3 The Cost of Money Four Major Fundamental Factors affecting the cost of money (interest rates) Production Opportunities - Investment opportunities in productive assets. Time Preferences for Consumption -Preferences of consumers for current consumption as opposed to saving. Risk -Chance that an investment will provide a low or negative return. Inflation -Amount by which prices increase over time.
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4 Interest Rate Levels Interest Rates are driven by supply and demand. Current interest rate minus current inflation rate + current real rate of interest. Represents how much investors really earn after taking out the effects of inflation.
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5 Determinants of Market Interest Rates Quoted Interest Rate = r r = r* + IP +DRP + LP + MRP Where r* is the real risk-free rate IP is the inflation premium DRP is the default risk premium LP is the liquidity premium MRP is the market risk premium
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This note was uploaded on 04/12/2008 for the course BUS 320 taught by Professor Sloan during the Fall '08 term at N.C. State.

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chapter 6 notes - BUS 320 Chapter 6 Interest Rates 1...

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