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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

unbiased expectations theory humped yield curve will

result from expected short-term to be
higher initially then subsequently fall in longer term