Ch5_1 - Interest rates and Risk premium Chapter 5 Factors...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Interest rates and Risk premium Chapter 5
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Factors influencing interest rates Supply Households Demand Businesses Government’s Net Supply and/or Demand Federal Reserve Actions
Background image of page 2
Level of interest rate Interest Rates Q 0 Q 1 r 0 r 1 Funds Demand Supply
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Determination of real interest rate Three major factors determining the equilibrium level of real interest rate 1. households’ supply of funds is a positive function of the level of real interest rate. As real interest rate rises, the opportunity cost of consumption increases that induces household to save more resulting in an increase in the supply of funds.
Background image of page 4
Determination of real interest rate 2. The businesses’ demand for funds is a negative function of the level of real interest rate. real interest rate rises the cost of capital increase the NPV of investment projects decrease a decrease in demand for funds
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Determination of real interest rate 3. The changes in macroeconomic policies
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/12/2011 for the course FINA 221 taught by Professor Na during the Spring '09 term at HKUST.

Page1 / 19

Ch5_1 - Interest rates and Risk premium Chapter 5 Factors...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online