Chapter 5 - Introduction to Risk, Return and the Historical Record

Chapter 5 - Introduction to Risk, Return and the Historical Record

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 5: Introduction to Risk, Return, and the Historical Record 5.1 Determinants of the Level of Interest Rates • Fundamental Factors that determine the level of interest rates: o The supply of funds from savers, primarily households o The demand for funds from businesses to be used to finance investments in plant, equipment, and inventories ( real assets or capital formation) o The government’s net supply of or demand for funds as modified by actions of the Federal Reserve Bank • Real and Nominal Rates of Interest o Interest rate- promised rate of return denominated in some unit of account over some time period o Nominal interest rate- the growth rate of your money o Real interest rate- the growth rate of your purchasing power o r = R – I r=real rate, R= nominal rate, i= inflation rate o I + r = 1+R/ 1+i o r = R – i / 1 + i o certificates of deposit offer guaranteed nominal rate of interest • The Equilibrium Real Rate of Interest o Supply, demand and government actions as well as expected rate of inflation determine the real interest rate o At higher real interest rates households will choose to postpone some current consumption and set aside or invest more of their disposable income for future...
View Full Document

This note was uploaded on 08/07/2011 for the course FIN 380 taught by Professor Winder during the Spring '10 term at Rutgers.

Page1 / 4

Chapter 5 - Introduction to Risk, Return and the Historical Record

This preview shows document pages 1 - 2. Sign up to view the full document.

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