Flashcards in Interest rates Deck (20)

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1

## most accurate measure of an interest rate

### yield to maturity

2

## loanable funds approach definition

###
- This treats the risk-free interest rates as an outcome of the forces of demand & supply in financial markets.

- Modelled by supply & demand curves

3

## (LF) which direction do the supply and demand curves slope

### demand curve slopes down and supply curves slope up

4

## where does the equlibrium rate sit

### at the intersection of the demand and supply curves

5

## effect of increase in demand from borrowers for LF curve

###
Demand increases by shifting to right

-interest rate increases

6

## effect of increase in money supply on LF curve

###
supply increases by shifting to the right

-interest rate decreases

7

## effect of real savings in community decreasing on LF Curve

###
supply decreases and shifts to the left.

-Interest rate increases

8

## effect of real capital inflows from off shore on LF curve

### supply increases which decreases the interest rate.

9

## bank decreases money supply

### supply decreases which causes interest rates to rise

10

## normal yield curve

###
upward sloping, positive

-higher interest rates for L/T

11

## inverse yield curve

###
downward sloping

-higher S/T rates, declining out to the L/T

12

## flat yield curve

### may indicate that interest rates are in transition or stable

13

## humped yield curve

### immediate liquid conditions but anticipated temporary tightness in the near future

14

## The 3 theories that explain term structure of interest rates?

###
1) Unbiased (pure) expectations theory

2)Liquidity premium

3) Market segmentation theory

15

## Key details regarding market segmentation theory

###
- rejects two assumptions

-which suggests market participants operate essentially in one maturity band

-this is determined by their sources & uses of funds

16

## key details of liquidity premium

###

-suggests that investors desire extra risk premium for compensating them for holding longer term sercurities

17

## key features of unbiased expectations theory

###
- unbiased expectations theory assumes that everyone correctly anticipates interest changes

- suggests that S/T rates implied by yeild curve are unbiased estimates of the market consensus of future rates

-normal yield curve will

result from expected short-term rates to be higher than current

short-term rates

-inverse yield curve will result from expected short-term rates to be lower than current short-term rates

-humped yield curve will result from expected short-term to be

higher initially then subsequently fall in longer term.

18

## unbiased expectations theory normal yield curve will

### result from expected short-term rates to be higher than current short-term rates

19

## unbiased expectations theory inverse yield curve will

### result from expected short-term rates to be lower than current short-term rates

20