ch 06_IM - Chapter 6 Interest Rates Learning Objectives...

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Unformatted text preview: Chapter 6 Interest Rates Learning Objectives After reading this chapter, students should be able to: List the various factors that influence the cost of money. Discuss how market interest rates are affected by borrowers need for capital, expected inflation, different securities risks, and securities liquidity. Explain what the yield curve is, what determines its shape, and how you can use the yield curve to help forecast future interest rates. Chapter 6: Interest Rates Learning Objectives 113 Lecture Suggestions Chapter 6 is important because it lays the groundwork for the following chapters. Additionally, students have a curiosity about interest rates, so this chapter stimulates their interest in the course. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 6, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the Lecture Suggestions in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 1 OF 58 DAYS (50-minute periods) 114 Lecture Suggestions Chapter 6: Interest Rates Answers to End-of-Chapter Questions 6-1 Regional mortgage rate differentials do exist, depending on supply/demand conditions in the different regions. However, relatively high rates in one region would attract capital from other regions, and the end result would be a differential that was just sufficient to cover the costs of effecting the transfer (perhaps of one percentage point). Differentials are more likely in the residential mortgage market than the business loan market, and not at all likely for the large, nationwide firms, which will do their borrowing in the lowest-cost money centers and thereby quickly equalize rates for large corporate loans. Interest rates are more competitive, making it easier for small borrowers, and borrowers in rural areas, to obtain lower cost loans. 6-2 Short-term interest rates are more volatile because (1) the Fed operates mainly in the short-term sector, hence Federal Reserve intervention has its major effect here, and (2) long-term interest rates reflect the average expected inflation rate over the next 20 to 30 years, and this average does not change as radically as year-to-year expectations. 6-3 Interest rates will fall as the recession takes hold because (1) business borrowings will decrease and (2) the Fed will increase the money supply to stimulate the economy. Thus, it would be better to borrow short-term now, and then to convert to long-term when rates have reached a cyclical low. Note, though, that this answer requires interest rate convert to long-term when rates have reached a cyclical low....
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This note was uploaded on 02/07/2010 for the course FIN 3331 taught by Professor Galla during the Spring '09 term at Troy Montgomery.

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ch 06_IM - Chapter 6 Interest Rates Learning Objectives...

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