Note 4 - Interest Rate and Stock Market Interest Rate the cost of borrowing money Borrowers are motivated by lower interest rates but investors look for

Note 4 - Interest Rate and Stock Market Interest Rate the...

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Interest Rate and Stock Market Interest Rate – the cost of borrowing money. Borrowers are motivated by lower interest rates, but investors look for high coupon rates (bond buyers) The Bank of Canada sets the Bank rate which in turn impact the prime rate and all other interest rates for consumers and businesses (mortgages, car loans, etc.) Prime Rate - The interest rate that commercial banks charge their most credit-worthy customers (lowest interest rate out of all customers) More risks associated with the loan, the higher the interest. Bank Rate - the interest rate Bank of Canada charges on loans to major banks (ex. TD, BMO, RBC) o Major banks make money from lending money at higher interest rate than borrowing interest rate There is an indirect relationship between interest rates and stock market performance; they tend to move in opposite directions When interest rate falls, businesses are able to finance expansion at a lower cost because borrowed money is "cheaper", which increases future profit potential and pushes up stock prices. Investment rises and consumer credit purchases increase also (ex. Mortgages, car loans) When rate fall, bonds become less profitable and investors move their cash out of the bond market into the stock market When interest rates are increasing, bonds become more profitable because of the higher coupon payment. People are encouraged to save money and buy bonds. Cash leaves the stock market for bonds. Higher rates slowdown business investment, and slowdown overall consumption and economic activity. This causes stock prices to stock increasing (generally) and stock prices may begin to fall Investors should monitor the bank of Canada's plans for monetary policy. Every 6 weeks BoC makes decision to either lower or increase the Bank rate. When inflation is very high (4-5%), bank usually increase interest rate to slow down consumer spending, and inflation will be kept under control. Bank of Canada 1 What are the bank of Canada's four main areas of responsibility? Its principal role is to promote the economic and financial welfare of Canada Monetary Policy - The Bank influences the supply of money circulating in the economy, using its monetary policy framework to keep inflation low and stable Financial System - The Bank promotes safe, sound and efficient financial systems, within Canada and internationally, and conducts transactions in financial markets in support of these objectives. Currency - The Bank designs, issues and distributes Canada’s bank notes. Funds Management - The Bank is the "fiscal agent" for the Government of Canada, managing its public debt programs and foreign exchange reserves 1 What is Canada's current rate of inflation? What is the target range (%) for the inflation rate that the bank of Canada is seeking?
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