ch2_determination of Interest Rates

ch2_determination of Interest Rates - Chapter2...

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

View Full Document Right Arrow Icon
Financial Markets and Institutions Chapter 2 Determination of Interest Rates
Background image of page 1

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

View Full DocumentRight Arrow Icon
Financial Markets and Institutions Loanable Funds Theory Loanable funds theory   The market interest rate is determined by  the factors that affect the supply of and  demand for loanable funds
Background image of page 2
Financial Markets and Institutions Loanable Funds Theory (cont’d) Household demand for loanable funds Households demand loanable funds to  finance Housing expenditures Automobiles Household items Usages There is an inverse relationship between  the interest rate and the quantity of  loanable funds demanded
Background image of page 3

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

View Full DocumentRight Arrow Icon
Financial Markets and Institutions Loanable Funds Theory (cont’d) Business demand for loanable funds Businesses demand loanable funds to invest in fixed assets  and short-term assets Businesses evaluate projects using net present value (NPV): • Projects with a positive NPV are accepted There is an inverse relationship between interest rates and  business demand for loanable funds = + + - = n t t t k CF INV NPV 1 ) 1 (
Background image of page 4
Financial Markets and Institutions Loanable Funds Theory (cont’d) Government demand for loanable funds Governments demand funds when planned  expenditures are not covered by incoming  revenues Municipalities issue municipal bonds The federal government issues Treasury  securities and federal agency securities Government demand for loanable funds is  interest-inelastic
Background image of page 5

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

View Full DocumentRight Arrow Icon
Financial Markets and Institutions Loanable Funds Theory (cont’d) Foreign Demand for loanable funds Foreign demand for U.S. funds is  influenced by the interest rate differential  between countries The quantity of U.S. loanable funds  demanded by foreign governments or firms  is inversely related to U.S. interest rates
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.

Page1 / 29

ch2_determination of Interest Rates - Chapter2...

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