lectur4-page8 - the nominal interest rate they charge...

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There are basically three different types of interest rates. Nominal interest rates, or market interest rates, are the interest rates that you actually observe in the market place for lending money to, or borrowing money from a lending institution or individual. When your banker quotes you 8.25% for an automobile loan, this is the nominal interest you are charged for borrowing money from this lender. When a banker quotes you 4.50% for a 24 month certificate of deposit (CD), this is the nominal interest rate you will receive for lending your money to the bank. The spread between the nominal interest rate the bank pays you for lending them money, and
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Unformatted text preview: the nominal interest rate they charge people to borrow money can be considered the banks gross profit margin. Remember, the bank has costs associated with borrowing and lending money as well; so that spread is not all cream! A bank must also consider the risk that it is taking lending money to folks There are some also consider the risk that it is taking lending money to folks. There are some people that will not be able to pay their loans back, and the bank can incur losses on that transaction. The other two interest rates, the real rate, and the risk-free rate will be explained very shortly. 8...
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