Ch 8 fully revised 2011

Ch 8 fully revised 2011 - 1 Chapter 8 Interest Rate Risk I...

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Chapter 8 Interest Rate Risk I 1
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Overview This chapter discusses the interest rate risk associated with financial intermediation: Federal Reserve monetary policy. Repricing model. Duration model will wait until Ch. 9. We will not discuss Appendices on term structure of interest rates and the maturity model. 2
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Determination of Interest Rates Interest rates determined by demand & supply for loanable funds. of funds - Central Bank (Federal Reserve). 3
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Federal Reserve Board: U.S. central bank. Open market operations influence money supply, inflation, and interest rates. Actions of Fed in response to 2001 attacks on World Trade Center. h Lowered interest rates 11 times during the year. June 2004 - August 2006. h Inflation concerns take prominence. h 17 consecutive increases in interest rates. h Some argue that the Fed did not raise rates soon enough or fast enough. 4
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Central Bank and Interest Rates Target is primarily short term rates. Focus on Fed Funds Rate (rates banks charge to each other in the Federal Funds market) in particular. Interest rate changes and volatility increasingly transmitted from country to country. Statements by Ben Bernanke can have dramatic effects on world interest rates. 5
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Crisis From August 2007 to December 2008, the federal funds rate target was reduced from 5.25% down to a range between 0% and 0.25%. The Fed announced it would buy more non- Treasury securities. The Federal Reserve has acted aggressively to inject liquidity into the global financial system using a variety of new programs (including quantitative easing). These were discussed in the Crisis slides.
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Ch 8 fully revised 2011 - 1 Chapter 8 Interest Rate Risk I...

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