# 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

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

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