Combined Chapter 6

Combined Chapter 6 - Chapter 6 Interest Rates Cost of Money...

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Interest Rates Chapter 6 § Cost of Money and Interest Rate Levels § Determinants of Interest Rates § The Term Structure and Yield Curves § Using Yield Curve to Estimate Future  Interest Rates 16-1
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What four factors affect the  § Production  opportunities § Time preferences  for consumption § Risk § Expected inflation Obj102 26-2
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Figure 6-1 36-3
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46-4
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Figure 6-3 56-5
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“Nominal” vs. “Real” Rates 66-6 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 5%  per year. rRF = represents the rate of interest on  Treasury securities.
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Determinants of Interest Rates 76-7 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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Premiums Added to r* for  86-8 IP MRP DRP LP S-T Treasury L-T Treasury S-T Corporate L-T Corporate
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Yield Curve and the Term  96-9 § Term structure –  relationship between  interest rates (or yields)  and maturities. § The yield curve is a 
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Combined Chapter 6 - Chapter 6 Interest Rates Cost of Money...

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