Interest Rates

Overview

Description

The observance and application of interest rates when investing is important within the field of finance. Many market considerations should be examined in predicting interest rates for planning an investment strategy and making sound financial decisions. The slightest change in returns might exceed an investor's expectations or result in unexpected losses. Understanding the available supply and demand of loans will dictate interest rates and the timing with which an investor might engage in financial transactions. Evaluating current market interest rates could signal a time to invest in low-risk investments such as risk-free securities. An informed investor recognizes the relationship between interest rates, maturity dates, and default risks.

At A Glance

  • Securities markets are governed by supply and demand.
  • The interest rate for the return on market investments is dependent on maturity term and risk.
  • Risk-free rates from Treasury securities are used as the baseline of commercial securities that have risk.
  • The observed market interest rate can be calculated.
  • The baseline interest rate assumes that there is no risk because it is calculated with reference to government-backed securities.
  • Investors engage with investments and assess risks based on the value of the bond at maturity because of inflation risk.
  • The yield curve is a graphical representation of risk and return and reflects economic depression, expansion, and flat economic growth.
  • If there is a risk of default, an investor expects to receive a premium in order to protect their investment.
  • The default risk premium can be calculated using the risk-free rate.
  • Investors are assumed to be risk averse and are offered incentives and strategies to balance risk with return.