Interest rates

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  • Types of interest rates
    • Real rate: purchasing power
    • Nominal: inflation
    • ex ante nominal: desired real rate of return plus an adjustment for expected inflation
    • Interest Rates
      • Fisher effect: relationship between real rates, nominal rates, and inflation: R=r+h
      • Long-term bonds are more sensitive to interest rate change than short-term bonds
      • Low coupon rate bonds are more sensitive to interest rate change than high coupon rate bonds
      • Term structure is the relationship between time to maturity and yields, all else equal: Normal – upward-sloping, long-term yields are higher than short-term yields (LT > ST rates) "  Inverted – downward-sloping, long-term yields are lower than short-term yields (ST < LT rates) "  Humped shape

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