Questions tagged [interest-rate]

The proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. The interest rate is typically determined by a combination of market forces and monetary policy.

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2answers
44 views

Will banks in the US continue to offer CDs?

Earlier this year, the Fed abolished the reserve requirement. My understanding was that the motivation for banks offering CDs was because the Fed didn't impose reserve requirements on CDs, so banks ...
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Why were Treasury interest rates 3-4% in 1999-2000, 2007-2008, but merely 0.6-0.7% now?

rymor comments on Is there a Tech bubble forming? The fact that 10 year treasury rates were 3-4% during the booms in 1999/2000 and 2007-8 is a big difference IMO. Now, you can’t get more than 0.2% in ...
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Was there a drop in liquidity in the corporate bond market during the Global Financial Crisis?

It is often said that the increase in the perceived default risk led to a fall in the demand for the corporate bonds. This led to the fall in their prices and hence, their interest rates rose ...
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93 views

How do low interest rates negatively impact bank earnings?

A lot of Banks are focused on bread and butter lending to small businesses and consumers. Many of those are putting aside provisions for loan losses in the wake of the Covid-19 pandemic. Headlines ...
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42 views

What is the difference between the cash rate and interest rate?

What is the difference between the cash rate and interest rate? I (in Australia) googled cash rate and according to wikipedia it is the "central bank charges on overnight loans between commercial ...
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Why would mortgage rates go up if interest rates go down?

What reasons or scenarios could cause a case where mortgage rates would rise if interest rates(federal funds rate) fall? Is that even possible?
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Why are the YTMs of TIPS of longer maturities more sensitive to current interest rates and inflation rates?

According to this website, the yields of TIPS of longer maturities are greater than that of TIPS of shorter maturities. It seems counterintuitive since yields of longer-maturity bonds, which are based ...
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1answer
51 views

Effect of change in discount rate on consumption — (Samuelson, 1958)

I was reading this paper by Paul Samuelson. I am puzzled by a bit on page 470, left column. Here he claims that $\frac{\partial C_3}{\partial R_{t+1}}>0$. Let me give a short description of what ...
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effective and annual interest rate compounded monthly?

I just started my Enginnering Economic and I met this question in my quiz PromInvest Inc. invested 5.5 million in a project ten years ago. As of today the worth of this project is 24.7 million. What ...
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1answer
32 views

Why does the Loanable Funds Market model use the real interest rate instead of the nominal interest rate?

As far as I understand, the majority of loan contracts specify a nominal interest rate, NOT a real interest rate. So a hypothetical loanable funds markets would have people suggesting potential ...
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32 views

Are coupons all semi-annual?

How do coupons get priced in together?
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37 views

Why do all/majority of loan contracts charge nominal interest rate instead of fixed real interest rate?

As far as I understand, all/majority of loan contracts charge nominal interest rate, there are (almost?) no loan contracts that charge fixed real interest rate. Why is it so? Normally I would expect ...
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60 views

Microeconomic rationale for UIP (uncovered interest rate parity)

The key idea behind UIP is that as for all common financial instruments, the "law of no free lunch" should also hold for currencies. However it differs from traditional replication-based no-...
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1answer
26 views

How do you benefit from a fall in interest rates in general as a creditor of public bonds?

I’m reading about England debt in 1819 and how interest rate benefited its creditors. The country had a public debt of more than 250% of the GDP. With peace at last achieved, London is faced with a ...
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What are the determinants of the natural rate of interest and how market rate converges to it?

I'd like to know how is determined the natural/neutral rate of interest. Moreover, how the market rate can converge to it ? If you have some references it would be great !
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1answer
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Deflate level and flow variables using PPI and CPI

What do statements like Flow variables (such as dividend growth and returns) are deflated using the CPI index. or Level variables are deflated using the Producer Price Index (PPI). mean? What are ...
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1answer
43 views

Is Currency Devaluation a cause or effect of interest rates?

I understand that Federal bank/Goverment can manipulate the currency market and devalue its currency by printing more money or buying foreign currencies/assets (essentially increasing the supply of ...
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1answer
32 views

Why is sovereign rate a reference?

I would like to know why we always focus on 10 years sovereign rates when we talk about interest rates ? Let me clarify. I'm reading a paper from the Bank of England that emphasizes the fact that ...
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1answer
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How to find the corresponding APR to a given APY?

Suppose that ​$6000 is invested in a 3​-month CD with an APY of 1.5​% I want to find the corresponding APR to a given APY. If 6000$ is invested in a 3​ month CD with an APY of 1.5​% then according to ...
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How penalties on repo fails work?

There are a couple of questions I have about imposing penalties on repo fails. Is the repo fail penalty imposed only on the seller of securities if it does not buy the securities back or also on the ...
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How is an interest swap collateralized

I am trying to understand what it means for an interest swap to be collateralized. If for example, I am paying fixed to a bank and receive floating in return. Who is giving collateral to whom? and how ...
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1answer
61 views

Is the money market model based on assumption of no interest rate targeting on the part of the central bank?

This is quote from Gregory Mankiw's macroeconomics text about mechanism of formation of the interest rate in the money market model: How does the interest rate get to this equilibrium of money supply ...
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1answer
28 views

Is there inverse relationship betweet prices of interest-bearing assets and the interest rate?

I was wondering about why investors converting out of interest-bearing assets into money in the money market cause the interest rate to increase. Then I remembered that there is inverse relationship ...
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1answer
33 views

Negative neutral real interest rate

What is the intuition behind having a negative neutral real interest rate?
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Quantitative easing and interest rate parity

Suppose a country initiates quantitative easing by printing money and buying government debt. This will put a downward pressure on interest rates. Will this action tend to depreciate the country's ...
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1answer
26 views

What are the differences between hedging with swaps, options or futures?

For instance if a bank wants to hedge against interest rate risk, it could use interest rate swaps, or options or futures contract. Or in any other example, when a manager is hedging against risks. ...
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Discount & Interest rates

Small question, is discount rates and interest rates the same/similar thing in economics? A bit confused regarding this.
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What determined the “cost of borrowing money” or the interest rate in a gold-based economy

In the modern economy, the central bank decides the cost of borrowing money using interest rates along with other several tools and technic. But I was wondering, in a gold-based economy (not the gold ...
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How does the federal funds rate compare to the federal discount rate?

The federal funds rate is the interest rate charged to banks when they borrow from each other overnight in the federal funds market to satisfy their reserve requirements. This rate is influenced by ...
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Interest rate determination in the real world

I have just learnt about the demand and supply framework for money and how the equilibrium interest rate in an economy can be determined. In theory, based on that framework, an increase in nominal ...
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Expected inflation in the real interest rate equation

Real interest rate = Nominal rate - Expected inflation In the above equation, in a quarterly data-set, which expected inflation shall be used? next quarter (q+1) or the same quarter of next year (q+4)...
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Effect of default risk on the interest rate of bonds

So I want to calculate the effect of default risk on the required interest of bonds (not on the price of bonds as that is normalized to one). I thought of using the consumption capital asset model ...
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Stabilizing Property of a Taylor Rule

Considering the New Keynesian Model we have the Phillips curve and dynamic IS curve in log-linearized form with price shock $u^{\pi}$ and demand shock $u^{IS}$ :$$\pi_t=\beta E_t\pi_{t+1}+\kappa(y_t-...
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4answers
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Mortgage loans from foreign banks at lower interest rates

I had a thought - what if I live in a relatively poor country like let's say Russia and I would like to buy a house. In order to do that, I need to take a mortgage loan. In Russia however, interest ...
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How can we get negative **real** interest rate?

According to Fisher's equation, Real interest rate=Nominal interest rate - expected inflation rate So, how can we get negative real interest rate? I'm in doubts. On one hand, purely from algebraic ...
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How central banks “create” negative interest rates?

How can the Fed push Fed Funds rate to negative? I think I understand how it works with >= 0 -- they just lend reserves for bonds until they hit their targets, but what about <0? Has this something ...
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Why do people buy negative interest rate bonds?

I get that people buy long term government bonds, because of how safe it is, and if there would be a recession the government would just print more money and could pay it back. But why would anyone ...
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1answer
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What would be the “text-book” result of governement taking on massive debt immediately before a significant recession [closed]

Supposing, (entirely hypothetically, of course ;) ), that the UK government had taken on massive future debts (by spontaneously giving 2-3% of GDP to its citizens, in GBP, say.) immediately before a ...
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Does the federal reserve create any type of deadweight/welfare loss?

In microeconomics, we learn that when a good is overproduced or under produced, there is a dead weight loss associated with it. It seems like the same concept would apply to macroeconomics, where the ...
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Does a rate hike by the Central Bank increase or decrease inflation?

Mainstream economic theory tells us that, in order to decrease inflation, the CB increases its rates so as to decrease loan creation which should decrease Aggregate Demand and thus lower inflation. ...
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Why Does Deficit Spending Work Without a Liquidity Trap?

My understanding is that in a functioning economy, the financial market clears when the nominal interest rate is above zero. It is only when it reaches zero that a liquidity trap occurs and the ...
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Regarding the role of the Fed in controlling interest rates

When it is said that the Fed cut interest rates, does this refer to the discount rate, fed fund rate or both?
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58 views

Calculating present value using Euler's number

So I was reading here where they calculate the expected value of an option at present given the expected value of the option in a year by calculating $$C_0 = C_1 e^{(-r)}$$ where r is the interest ...
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How to interpret correctly the uncovered interest rate parity condition

So, according to my macroeconomics professor's notes, the UNCOVERED INTEREST RATE PARITY CONDITION is defined this way : Now, i don't quite grasp the concept of the 'expected appreciation rate of ...
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Value of money (incomes) question - what is the “r” here?

I would like some help with a fairly basic "value of money" question. (I'm very much a beginner in this field so please bear with me.) I'm writing about income changes throughout a decade (2010-2019)....
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The government is issuing massive debt for coronavirus relief - why aren't interest rates rising?

As I understand it, the US Treasury Department issues bonds to pay for the government's coronavirus rescue spending. I might have thought that such a large input to the fixed income market on the ...
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1answer
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Ambiguity on a relation between inflation, interest rates, and central banks

When working on inflation, central banks, interest rates etc., I summarized the info in various sources as follows: When there is not enough money in the economy system, the money in circulation ...
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How to define world interest rate using IS-LM-BP diagram?

Can you suggest where is the world interest rate in the economy which has a positive current account and a financial account surplus, fixed exchange rate and relative capital immobility? The graph of ...
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Why does the money supply graph have nominal and not real interest rate as the y-axis

Why does the money supply graph have nominal and not real interest rate as the y-axis. And, shouldn't an increase in money supply cause and increase in inflation and thus nominal ir.
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Estimating probability of Central Bank's interest rate changes

Recently, I came across this article, which offers a simple model for estimating the probabilities of interest rate cut/hike from a central bank. This is done by using market data, especially normal ...

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