Vocabulary

compound interest

interest rate multiplied by the sum of any remaining unpaid principal and unpaid cumulative interest, as of the previous period

cost-push inflation

situation that occurs when increased production costs, such as for raw materials and labor, cause elevated price levels

default risk

level of risk investors and lenders may incur in the event that a borrower defaults on a loan

default risk premium

additional fee that a borrower is charged to compensate for the possibility that the borrower might be unable to pay back the loan

demand-pull inflation

increase in consumer demand for a product or service, causing an increase in price levels

equilibrium interest rate

rate when the demand of money equals the supply of money

expectations theory

belief that future expected short-term interest rates are based on current expectations of long-term interest rates

high-yield bond

bond with a low credit rating for which investors can expect a high return on investment

inflation

continual increase in the average price levels of goods and services

inflation premium

increase in the normal rate of return to investors to compensate for anticipated inflation

interest rate

amount due per period, as a percentage of the amount owed by the borrower to the lender at the end of the previous period

liquidity preference theory

belief that investors require a higher premium on medium- and long-term investments versus short-term investments to offset investors' desire for greater liquidity

liquidity premium

additional financial return expected by investors to offset assets not easily converted to cash

loanable funds theory

belief that the interest rate is established by the supply and demand of loanable funds

market interest rate

interest rate based upon the supply of credit and a demand for credit in the marketplace

market segmentation theory

belief that short-term and long-term interest rates are separate and not associated with each other

marketable government security

government security, such as bonds and Treasury bills, that offers high quality, liquidity, and marketability

maturity risk premium

extra premium an investor receives for engaging with investments that have a longer duration until maturity

nonmarketable government security

government-issued debt security, such as U.S. savings bonds and federal government bonds, that is illiquid and difficult to trade

real rate of interest

adjusted interest rate to remove inflation to indicate the real cost of an investment

risk-free interest rate

expected rate of return with no risks or financial losses, often estimated from U.S. bonds and treasuries

simple interest

interest rate multiplied by the initial principal

speculative inflation

belief that prices will continue to rise, causing people to purchase more now to minimize losses and maximize gains

term structure of interest rate

relationship between nominal interest rates and the time to maturity of comparable quality securities

Treasury bill

government security issued by the U.S. Treasury representing a short-term debt obligation, with a relatively low interest rate and maturity period within one year

Treasury bond

fixed-interest government-issued bond with a maturity date of over 10 years and up to 30 years

Treasury note

U.S. government security with a fixed interest rate and maturity between 2 and 10 years

U.S. Treasury security

Treasury bill, Treasury bond, or Treasury note issued by the U.S. Treasury and considered to be risk free

yield curve

graphical representation showing the interest rates of securities with similar risk and maturity