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331 exam 2

331 exam 2 - Chp 5 Determination of the level interest rate...

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Unformatted text preview: Chp 5 Determination of the level interest rate: the supply of funds from savers households. Demand for funds from busniesses to be used finance investment in real assets and capital imformation. Gover’s net supply of demand for funds as modified by action of the federal reserve bank. Nominal interest:growth rate of your money. Real interest:growth rate of your purchasing power.real=R-1/1+i Equilibrium real interest is the intersection of the supply and demand curve (E). Fisher equation: R=r+E(i):if real rates are reasonably stable, then increase in nominal rates ought to predict higher inflation rates. The real after tax rate is after tax nominal rate minus inflation. Effective annual rate:percentage age increase in funds invested over a 1-yr horizon.1+EAR=[1+r(T)] 1/T . Annual percentage rates:=(1+EAR) T-1/T Holding period return:ending price-beg+cash divi/beg. Expected return:E(r)=sum p*r variance=sum p(r-E) 2 Excess return:The difference in particular period between actual rate of return on a risky asset...
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