Chapter_06 - 6-16-1Click to edit Master subtitle...

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Unformatted text preview: 6-16-1Click to edit Master subtitle styleCHAPTER 6nDeterminants of Interest RatesnThe Term Structure Expectations HypothesisnMonetary Policy6-2What four factors affect the level nProduction opportunitiesnTime preferences for consumptionnRisknExpected inflationO bj1 0 2These all affect the cost of money!6-3“Nominal” vs. “Real” rates r= represents any nominal rate (a.k.a. quoted rate)r*= represents the “real” risk-free rate of interest. rRF= represents the rate of interest on Treasury Bills (short term securities)IP = Inflation Premium6-4Determinants of interest ratesr = r* + IP + MRP + DRP + LPr =required return on a debt securityr*=real risk-free rate of interestIP=inflation premiumMRP=maturity risk premium6-5Premiums added to r* for different IPMRPDRPLPS-T TreasuryL-T TreasuryS-T CorporateL-T Corporate6-6What Do Interest Rates Look nTodays Rates:nhttp://www.bloomberg.com/markets/rates/index.html6-7Yield curve and the term nTerm structure – relationship between interest rates (or yields) and maturities.nThe yield curve is a graph of the term structure.nThe October 1st 2009 Treasury yield curve For current yield curve, see6-8Constructing the yield curve: nStep 1 – Assume r* =3%nStep 2 – Find the average expected inflation rate over years 1 to N:6-9EXAMPLE - Assume inflation is expected to be 5%...
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Chapter_06 - 6-16-1Click to edit Master subtitle...

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