What is an interest rate?:
What is an interest rate? The percentage money charged for its use.
How is it established?:
How is it established? The bond market Bond price and IR are Inversely related
Example:
Example Let’s say you go to the bank and borrow $1000 with an interest rate of 10%. How much interest will you be paying? You borrow $1000 IR is 10% Interest = 100
Present Value:
Present Value
Future Value:
Future Value
Example:
Example Buy a bond today for $1000 with an interest rate of 10%. You would like to find what the bond will be worth in 5 years. FV=$1,610.51
Nominal vs. Real Interest Rate:
Nominal vs. Real Interest Rate Say your bank account had $100 in it at the beginning of the year and ended with $110. The nominal interest rate would be 10%. However, if the economy’s
inflation was 10%, $110 now would buy the same amount as the $100 would at the beginning of the year, the real interest rate was 0.
Economy and Interest Rate today:
Economy and Interest Rate today Unemployment 8.6% Consumer spending in third quarter of 2011 was up to 2.3% Commercial Banks will more than likely keep rates at 3.23% through 2013
Short term and long term IR:
Short term and long term IR Short term: rate on loan or an obligation with a maturity of less than one year Long-term: rate on a financial instrument with a maturity of more than one year. Riskier and usually higher than short-term interest rates
Thank you!:
Thank you!