6thCh6P_1 - 6-1CHAPTER 6Interest RatesDeterminants of...

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Unformatted text preview: 6-1CHAPTER 6Interest RatesDeterminants of interest ratesThe term structure and yield curvesInvesting overseas6-2What four factors affect the level of interest rates?Production opportunitiesTime preferences for consumptionRiskExpected inflation6-3Different Consumption PreferencesBorrow or lend to achieve the individual consumption desiredIncome next year ($)Income today ($)6-46-5Nominal vs. Real ratesr= represents any nominal rater*= represents the real risk-free rate of interest. Like a T-bill rate, if there was no inflation. Typically ranges from 0.5% to 4% per year.rRF= represents the rate of interest on Treasury securities. (no risk of default); rRF =r* + IP, where IP is Inflation premium IP = (avg. inflation rate expected over life of security) & compensates investors for expected loss of purchasing power.6-6Determinants of interest rates...
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This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

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6thCh6P_1 - 6-1CHAPTER 6Interest RatesDeterminants of...

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