Chapter06 - Chapter 6 Interest Rates Learning Objectives...

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Unformatted text preview: Chapter 6 Interest Rates Learning Objectives After reading this chapter, students should be able to: Explain how capital is allocated in a supply/demand framework, and list the fundamental factors that affect the cost of money. Write out two equations for the nominal, or quoted, interest rate, and briefly discuss each component. Define what is meant by the term structure of interest rates, and graph a yield curve for a given set of data. Explain what factors determine the shape of the yield curve. Use the yield curve and the information embedded in it to estimate the market’s expectations regarding future inflation and risk. List four additional factors that influence the level of interest rates and the slope of the yield curve. Discuss country risk. Briefly explain how interest rate levels affect business decisions. Chapter 6: Interest Rates Learning Objectives 117 Lecture Suggestions Chapter 6 is important because it lays the groundwork for the following chapters. Additionally, students have a curiosity about interest rates, so this chapter stimulates their interest in the course. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 6, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 2 OF 58 DAYS (50-minute periods) 118 Lecture Suggestions Chapter 6: Interest Rates Answers to End-of-Chapter Questions 6-1 Regional mortgage rate differentials do exist, depending on supply/demand conditions in the different regions. However, relatively high rates in one region would attract capital from other regions, and the end result would be a differential that was just sufficient to cover the costs of effecting the transfer (perhaps ½ of one percentage point). Differentials are more likely in the residential mortgage market than the business loan market, and not at all likely for the large, nationwide firms, which will do their borrowing in the lowest-cost money centers and thereby quickly equalize rates for large corporate loans. Interest rates are more competitive, making it easier for small borrowers, and borrowers in rural areas, to obtain lower cost loans....
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Chapter06 - Chapter 6 Interest Rates Learning Objectives...

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