...Jeniffer Kim Theory of Interest Professor Chiacchiere How Interest is Effecting the U.S. Markets Today In 5000 BC, the lending of “food” money was commonplace in Middle East civilizations. Early loans and interest were based on agricultural produce. Because the acquired seeds and livestock could be replenished and reproduce themselves, the people could easily repay loans with interest using these goods. Throughout history, the practice of having interest charged on loans developed over the years. Today, people pay interest using various foreign currencies. It has been legal and regulated by different states, but it also has been restricted in different countries because of religious reasons. In the past, some cultures have regarded charging any interest for loans as sinful. Charging interest was known as ursury and Christians, Muslims and even Buddhists condemned those who practiced it. Although some disapproved of charging interest, there is no doubt that it has played a large role in moving the markets and impacting our society today. In the U.S., changes in interest rates can have both a positive and negative effect on the economy, inflation and recessions, and the stock and bond markets. Many may ask why people use interest in their everyday lives and how it makes a direct impact on the economy. When an individual takes out a loan from a bank or another party, there is a possibility that the borrower will not repay the money. The purpose of interest is to compensate lenders...
Words: 1382 - Pages: 6
...term interest rate. A Interest Rate is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve Board policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 or 9%. From a consumer's perspective, the interest rate is expressed and when the interested is earned, for example, from a savings account or a certificate of deposit. When the interest is paid, for example, for a credit card, a mortgage, or a loan, the interest rate is expressed as annual percentage rates. Interest rates are the price for borrowing money. Interest rates move up and down, reflecting many factors. The most important among these is the supply of funds, available for loans from lenders, and the demand, from borrowers. For example, take the mortgage market. In a period when many people are borrowing money to buy houses, banks and trust companies need to have the funds available to lend. They can get these from their own depositors. If the demand for borrowing is higher than the funds they have available, they can raise their rates or borrow money from other people by issuing bonds to institutions in the "wholesale market". The trouble is, this source of funds is more expensive. Therefore interest rates will...
Words: 504 - Pages: 3
...DEFINITION OF 'INTEREST RATE' The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the "lease rate". When the borrower is a low-risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher. 1. What does negative interest rate mean? It is actually possible for real interest rates to be negative if the inflation rate exceeds the nominal rate of an investment. For example, a bond with a 3% nominal rate will have a real interest rate of -1% if the inflation rate is 4%. A comparison of real and nominal interest rates can therefore be summed up in this equation: Nominal interest rate – Inflation = Real interest rate An interest rate paid by a lender to a borrower rather than the other way around. Negative interest rates may occur when the interest rate is below the inflation rate, or when the lender actually pays the borrower more. Negative interest rates occur during periods of high volatility. Denmark and Switzerland have negative rates, as well...
Words: 1663 - Pages: 7
...Corporate Finance & Asset Markets M1 – Finance & Economics Track Solutions to Assignment 5: Section 8 - Interest Rates and Bonds Solutions to Part A: Practice Problems 1. When you are paying out money, you prefer not to pay interest on interest. Thus, you would prefer a low compounding frequency, which is monthly. 2. If the term structure is flat and a 2-year bond with a face value of $1,000 and a 3.5% annual coupon (paid semi-annually) is selling at par, this means that the annual discount rate (compounded semi-annually) is 3.5%, since 4 1, 000 = t=1 1, 000 17.50 + . t (1 + 0.0175) (1 + 0.0175)4 But then it is straightforward to value bonds with any coupon rate and maturity: (a) 10-year bond with a 2% coupon: 20 V = t=1 10 1, 000 + t (1 + 0.0175) (1 + 0.0175)20 1− 1 (1 + 0.0175)20 + 1, 000 (1 + 0.0175)20 = 10 0.0175 = 874. (b) 10-year bond with a 6% coupon: 20 V = t=1 1, 000 30 + t (1 + 0.0175) (1 + 0.175)20 1− 1 (1 + 0.0175)20 + 1, 000 (1 + 0.0175)20 = 30 0.0175 = 1, 209. 3. Expressing the present values bond prices B(0, t), we get A : 92.70 B : 102.10 C : 111.25 of the coupon bonds in terms of the pure discount = 103 B1 = 6 B1 + 106 B2 = 12 B1 + 12 B2 + 112 B3 Solving sequentially, the solution is B1 = 0.900, B2 = 0.912, and B3 = 0.799. 1 4. (a) The discount factors B1 and B2 implicit in the bonds prices should satisfy: 82.0 = 100 B2 92.5 = 6 B1 + 106 B2 102.5 = 12 B1 + 112 B2 Solving for B1 and B2...
Words: 712 - Pages: 3
...Assignment #3 Intrest rates are considered to be the price of holding money and the opportunity cost of any investment. After analysing intrests rates in our course do you think that interest rate in Egypt reflect the real opportunity cost of holding money? why or why not? Please support your answer with all the references you have searched. The opportunity cost of holding money is the cost that could be realized if money were invested instead of held. In other words, it is the interest rate that money is earning in a chosen investment. Typically, it is the interest rate that is set on a bond, particularly a government bond. Given the other investment choices that could be made, this cost could be very different from one person or entity to another. To determine the true opportunity cost of holding money, it is necessary to first determine what the investment vehicle would have been. After that, the next step is to research what the interest rate would be on that investment strategy. If the annual percentage rate is a single percent, then one percent annually would be the opportunity cost of holding onto the money. Assigning a definite value would require first knowing how much money was being held, and how long it would be held for. In economics, investing and holding money are known as mutually exclusive choices. This means that both cannot be done at the same time with the same money. If the money is being invested, it cannot be held. It may be possible for an individual...
Words: 510 - Pages: 3
...HANOI UNVIERSITY Faculty of Management and Tourism INTEREST RATE’S MOVEMENTS IN VIETNAM 2011-2013 Subject: Financial and Monetary Theory Tutor: Ms. Đào Mai Hương Tutorial: Tut 5 – FB10 Members: * Nguyễn Ngọc Minh - 1004040065 * Nguyễn Thị Lương - 0907010138 * Lê Thị Trang - 0907010234 * Trần Thị Ngọc Yến - 0901040092 Hanoi - 2012 Table of Contents I. Introduction 3 II. Interest rate in Vietnam 3 1. Definition 3 2. Basic interest rate 4 3. Ceiling of borrowing interest rate 5 III. Movement and factors affecting interest rate in Vietnam 6 1. In 2011 6 2. In 2012 7 IV. The effect of interest rate’s changes on banking industry 9 1. In 2011 9 2. In 2012 10 3. Forecast for 2013 11 V. Conclusion 11 Table of Graphs Graph 1 5 Graph 2 5 Graph 3 6 Graph 4 7 Graph 5 8 Graph 6 8 Graph 7 9 Graph 8 10 I. Introduction In Vietnamese financial system nowadays, banking has been the field with highest development speed. However, in the context of global economy depression, this bank’s quick growth makes our economy face many macro issues including freeze of real estate, fluctuation of gold price and interest rate, inflation, bad debt, especially interest rates of deposits and loans which mainly bring profit to banks. Banking system as financial intermediary in secondary market raises funds from different sources and then provides loans to customers and investment in securities...
Words: 2500 - Pages: 10
...supply within the economy, the bank of England is the legal entity with the authority to control the money available in the country. The bank of England (BoE) is likely to raise the interest rate over the coming years. There are several policies in which a country can resort to in order to accomplish this. These actions taken are known as monetary policies. Some of these tools include open market operations, refinancing rate, and reserve requirements. First, it is important to understand the relationship between money supply and interest rates in an economy. An interest rate is known as the amount of money a borrower is charged by a lender over the value of the loan they have taken. The interest rate is determined in a money market. Money supply is fixed by the central bank shown In figure 1, fixed at (Sm). The demand for money slopes downward as it illustrates the negative relationship between the quantity demanded for money and the interest rate. The interest rate is determined by the intersection of the supply of money (Sm) and the demand for money (Dm). In attempt to increase interest rates in the economy, the bank of England must use contractionary monetary policies that will decrease the money supply in the economy. Once money supply is decreased it will shift left to Sm(2). As result interest rate will rise to meet a new equilibrium of IR(2),...
Words: 266 - Pages: 2
...economy. They announced to cut the key interest rate below zero to stimulate lending and economic growth. Draghi said the ECB still saw no evidence of eurozone deflation but said the longer inflation remained at very low levels, the greater the risks. ECB president Mario Draghi said the decision to cut rates reflected an outlook of low inflation and economic weakness in the eurozone; the longer inflation remained at very low levels, the greater the risks. The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term. This study is to discuss the measures set upon by ECB is really workable to all the countries in the Euro zone. While the cut on interest rate was implemented since November and if the negative interest rate will help support the ??? Risks of deflation 1. Unemployment. Unemployment in Europe has increased significantly since 2008, with the unemployment rate peaking at 12.2%. Consumer prices rose by just 0.5% in the eurozone in May. The ECB targets inflation of just below 2% over the medium term, and on Thursday cut its own forecasts for the next three years. It sees consumer price inflation of just 1.4% in 2016. Speaking at a press conference after the announcement of the rate cut, Mr Draghi said the bank expected to see "a prolonged period of low inflation followed by a gradual upward movement towards inflation rates of below but close to 2%", and said...
Words: 1075 - Pages: 5
...structure of interest rates. What are the effects of rise in risk and expectations on the formation of long term rates? Interest rate within an economy is subject to many factors and as a result varies in relativity of those. The major factors are time period: short term Vs. long term investments, the degree of risk to which its exposed (AAA rated, mortgages, default, zero coupon…). Term structure of Interest rate is a significant tool for investors of bonds but also for policy makers, in terms of having an overview of whether to invest in short or longer term securities. This essay will go on to explain the term structure of interest rate how it is used by investors, the different theories and hypothesis behind it but also how the creation of long term rates effects its relation to risk. The term structure of interest rates also called the yield curve shows the relationship between interest rate and time to maturity of bonds, it is a common method of bond valuation. A graph is used to represent this relationship in relation to long term interest rates and short term interest rates where the maturity of an investment (x axis ) is compared to the interest rate (y axis) showing the yield (rate return) on bonds with the different maturity length. Term structure of interest usually refers to zero coupon bonds which are bonds without coupons (weekly interest rate payments on the bond) which are sold at its face value requiring as a result a fixed interest rate. The yield...
Words: 1779 - Pages: 8
...Interest rates are considered to be the price of holding money and the opportunity cost of any investment. After analyzing interest rates in our course do you think that interest rate in Egypt reflects the real opportunity cost of holding money? Why or why not? Please support your answer with all the references you have searched. Interest Rate is: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. That’s why interest rate should cover the opportunity cost of lending the money to the borrower. Also, interest rate should cover the inflation rate in the economy, as by time the lender receives the principal again due to inflation, the money will be of less value than when first lent to the borrower. So, if the interest rate doesn’t cover both the opportunity cost and inflation, it’ll be irrational decision to lend the money. For example, if the lender can invest in some real estate and construction projects with an average return of 10% & if inflation is 10%, then the interest rate should be more than 20% to be rational choice for the lender to lend the money. Interest rate in Egypt: (Lending Interest Rate) So, The lending interest rate is now at 9.75% annually, so, does this rate covers the inflation rate & opportunity cost of investing...
Words: 332 - Pages: 2
...A Riddle of Liquidity and Interest Rate Chumphol Mahattanakul B.Econ.(Quantitative), B.Eng.(Electrical), M.S.(Operations Research) The article is to illustrate a certain money market mechanism through which additional supply of money is schematically siphoned out in order to salvage the sinking financial institutions via the lendings of Financial Institutions Development Fund. It has dried up a liquidity available for the real sector with an embedment of higher interest rate. A certain part of this article is to show that there remains a room in case of no additional fund received that an interest rate could be brought down without affecting the FIDF operation, and also benevolent to the real sector. CHARACTERIZATIONS With a limited additional source of fund as characterized by SS curve of which the vertical portion is reflecting its scarcity. A curve of FIDF demand for money, DD(FIDF), is something positioned upper and right-hand-side a demand for money curve of the real sector, DD(real sector), and then bent downward as if it is meeting a saturation point along the salient part of inelasticity. Interest Rate S S1 D (FIDF) i* S i1 i1' i2' i2 D(real sector) S' S'' S1 S2 O A1 A2' D(real sector) A2 D (FIDF) M* M1 M2 A* A1' M Money Supply Empirically-constructed curves of demand of and supply for money to explain how a money-siphoned mechanism works IMPASSIVE SCENARIO An artificial rate of interest i* enables the FIDF to draw on the additional money supply out of...
Words: 821 - Pages: 4
...industry began to fail, the US Treasury increased the interest rate on Treasury bills as a way to bring more money back to the government. As you can see from the graph, in 2009 a 1 year Treasury bill had an average interest rate of 0.55%. Throughout the short recession, the interest rate remained above 0.20% because Treasury bills were not in high demand. People had their own financial troubles, so very few could afford to send money to the government. In the first few quarters of 20122, you can see a drop in the interest rate. This was a result of the recession coming to an end. More people were able to buy Treasury bills, lowering the interest rate. In early 2012, the interest rate rose slightly, then dropped off to 0.12%, where it has remained steady since. Taking a look at the four week, three month, and six month Treasury bills, you can see the same trends. In the first quarter of 2011, the four week bill dropped substantially, from 0.10% to 0.02% and remained there until the economy began to pick back up. Notice the steady rise during 2012, and then another drop off during the second quarter of 2013. This means more people were buying Treasury bills. The three and six month Treasury bills were very similar during the recession. At the beginning of 2009, those bills were relatively high in interest rates. As there was a larger demand, the interest rates began to drop off, until 2012, when demand eased up and the interest rates began to rise again. During 2013, both these bills...
Words: 667 - Pages: 3
...Research Article: IMPACT OF INTEREST RATE ON INVESTMENT Farhan Nawaz UNIVERSITY OF GUJRAT, PAKISTAN Waqas Akram UNIVERSITY OF GUJRAT, PAKISTAN Abstract: The main aim of this study is to investigate “the impact of interest rate on investment” in an economy. For this purpose three main variables are selected which are Interest rate, Income level and Investment. Two variables are independent (Interest rate and Income level) and One variable is dependent (Investment). The hypothesis of this study is that the Investment has a negative association with interest rate and Investment has positive relationship with income. Interest rate has negative effect on investment and investment has a positive relation with the income level. We use questionnaire for finding our results and questionnaire are filled by different students of business studies. We find that there is a Negative relation between the interest rate and investment. If our finding matches with economic theory and others researchers finding than policy makers can make better policies for the economy. Impact of interest rate on Investment Introduction: An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Interest rate is the cost of borrowing money. When interest rate increases the overall investment is reduces. Most of the businesses invest partially or wholly is credited. When increases in the interest rate companies have to put more...
Words: 1665 - Pages: 7
...At the beginning of September 2015, the European Central Bank maintain its key rate unchanged at 0.05%, its lowest level at which was reached in September 2014. This policy aims to stimulate investment, consummation, and reduce excess savings, and finally to boost growth in Europe. But the European Central Bank has also lowered this month its inflation and growth forecasts in the Eurozone, citing weakness in oil prices, the decline in global demand, but also concerns about emerging markets, and new risks from the slowdown in China. So the interest rates will certainly remain at their historic lows for several more months in Europe. On the contrary, in the US, due to the improved economic situation and growth prospects, raising interest rates by the Fed is inescapable, and will certainly take place before the end of 2015. The financial markets consider that this increase could be decided at the next meeting of the Monetary Policy Committee of the Fed on 16 and 17 September. Many analysts see the later meetings in October and December, due to signs of a slowdown in the Chinese economy that shook the financial markets since mid-August. Sources: http://www.economist.com/blogs/economist-explains/2015/08/economist-explains-21 http://www.armstrongeconomics.com/archives/tag/interest-rates http://www.cnbc.com/2015/09/03/ecb-leaves-interest-rates-unchanged-as-expected.html...
Words: 251 - Pages: 2
...------------------------------------------------- Interest rates are considered to be the price of holding money and the opportunity cost of any investment. After analyzing interest rates in our course do you think that interest rate in Egypt reflects the real opportunity cost of holding money? Why or why not? Please support your answer with all the references you have searched. Interest Rate is: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. That’s why interest rate should cover the opportunity cost of lending the money to the borrower. Also, interest rate should cover the inflation rate in the economy, as by time the lender receives the principal again due to inflation, the money will be of less value than when first lent to the borrower. So, if the interest rate doesn’t cover both the opportunity cost and inflation, it’ll be irrational decision to lend the money. For example, if the lender can invest in some real estate and construction projects with an average return of 10% & if inflation is 10%, then the interest rate should be more than 20% to be rational choice for the lender to lend the money. Interest rate in Egypt: (Lending Interest Rate) So, The lending interest rate is now at 9.75% annually, so, does this rate covers the inflation rate & opportunity...
Words: 765 - Pages: 4
