Chapter 06 w Learning Obj

Chapter 06 w Learning Obj - Chapter 6 Interest Rates...

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    6-1 Chapter 6 - Interest Rates Learning Objectives After reading this chapter, students should be able to: Explain how capital is allocated in a supply/demand framework, and list  the fundamental factors that affect the cost of money. Write out two equations for the nominal, or quoted, interest rate, and  briefly discuss each component. Define what is meant by the term structure of interest rates, and graph  a yield curve for a given set of data. Explain what factors determine the shape of the yield curve. Use the yield curve and the information embedded in it to estimate the  market’s expectations regarding future inflation and risk. List four additional factors that influence the level of interest rates and  the slope of the yield curve. Discuss country risk. Briefly explain how interest rate levels affect business decisions.
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    6-2 CHAPTER 6 Interest Rates Determinants of interest rates The term structure and yield  curves Investing overseas
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    6-3 What four factors affect the level  of interest rates? Production  opportunities Time preferences for  consumption Risk Expected inflation
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    6-4 “Nominal” vs. “Real” rates r = represents any nominal rate r* = represents the “real” risk-free rate  of interest.  Like a T-bill rate, if there  was no inflation.  Typically ranges  from 1% to 4% per year. r RF = represents the rate of interest on  Treasury securities.
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    6-5 Determinants of interest rates r = r* + IP + DRP + LP + MRP r   = required return on a debt security r* = real risk-free rate of interest IP = inflation premium DRP= default risk premium LP = liquidity premium MRP= maturity risk premium
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    6-6 Premiums added to r* for  different types of debt IP MR P DR P LP S-T Treasury L-T Treasury S-T Corporate L-T Corporate
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This note was uploaded on 07/18/2009 for the course FIN 3331 taught by Professor Nowacki during the Spring '09 term at Troy.

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Chapter 06 w Learning Obj - Chapter 6 Interest Rates...

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