Interest Rates

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Interest Rates: Back to the Basics:

Interest Rates: Back to the Basics Keaton Hewitt Alyson Baughman Emily Olson

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!

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