ch 06 - Interest Rates Chapter 6 Cost of Money and Interest...

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Unformatted text preview: Interest Rates Chapter 6 Cost of Money and Interest Rate Levels Determinants of Interest Rates The Term Structure and Yield Curves Using Yield Curve to Estimate Future Interest Rates 6-1 What four factors affect the level of interest rates? Production opportunities Time preferences for consumption Risk Expected inflation 6-2 “Nominal” vs. “Real” Rates 6-3 r = represents any nominal rate r* = represents the “real” risk-free rate of interest. Like a T-bill rate, if there was no inflation. Typically ranges from 1% to 5% per year. r RF = represents the rate of interest on Treasury securities. Determinants of Interest Rates 6-4 r = r* + IP + DRP + LP + MRP r = required return on a debt security r* = real risk-free rate of interest IP = inflation premium DRP = default risk premium LP = liquidity premium MRP = maturity risk premium Premiums Added to r* for Different Types of Debt 6-5 IP MRP DRP LP S-T Treasury L-T Treasury S-T Corporate L-T Corporate Yield Curve and the Term Structure of Interest Rates 6-6 Term structure – relationship between interest rates (or yields) and maturities. The yield curve is a graph of the term structure....
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This note was uploaded on 02/06/2012 for the course ECON 111 taught by Professor Risnit during the Spring '11 term at SUNY Suffolk.

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ch 06 - Interest Rates Chapter 6 Cost of Money and Interest...

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