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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General mechanism of bond price and real interest rate movements
Jeremy Siegel writes in "Stocks for the long run" that when better than expected economic data is released bond prices fall and real interest rates go up.
Why do bond prices fall with ...
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Calculating the value of this asset
calculate the cash value of a financed asset that is paid in the following way: an initial payment of 500,000, in month 2 a payment equal to half its value, in month 7 a payment equal to a third of ...
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Future value of a "future" investment
Consider the following well-known simple exercise :
You have a loan outstanding. It requires making three annual payments
at the end of the next three years of $1,000 each. Your bank has
offered to ...
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Does monetary policy render mathematical models for short-rates nearly useless?
Note: please do note that I am a tech person with no economics background.
I've been studying short-rate models so much for interview purposes and finally took a step out of the weeds to think about ...
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What is the argument that suggests to the Federal Reserve that it is reasonable to cause a recession in order to prevent inflation?
The current risk of recession appears to be caused solely by the Federal Reserve's refusal to stop raising interest rates.
When making this decision, the FRB seems focused solely on the risk of ...
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Interest rates vs consumption tax brackets
I know only a little bit about economics, but I have been puzzled why interest rates should be used to combat inflation where direct solutions exist.
I have some trouble understanding why interest ...
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Can you change monthly monetary shocks into quarterly ones?
There are now many series deriving monetary shocks at high frequency, e.g., Jarocinski-Karadi (AEJ:M, 2020), Bauer-Swanson (NBER MA, 2023).
These typically come at a monthly frequency. However my ...
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Relationship between bonds and interest rates
I read the following sentences from the book about the bond and interest rate.
First explanation goes like this:
When bond traders talk about yield they are usually referring to the YTM [Yield to ...
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Does the ECB issue staff projections for its own interest rates, as the Fed does?
I can see that it has a 'projections' segment here:
ECB staff forecast
But it seems to take market rates as reference.
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What is a European Bond and how is its Yield Calculated?
I've become a bit confused at the concept of a European(or Eurozone) Bond. I can't seem to understand if this is just a weighted average of all the EuroZone countries government bond yields or if this ...
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Why people buy foreign bonds when foreign interest rate raises?
I'm reading Investopedia's How National Interest Rates Affect Currency Values and Exchange Rates to understand how interest rates affect exchange rates.
It says:
Generally, higher interest rates ...
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how does Fed's discount rate affect risk-free rate
So the Fed's discount rate is the rate charged on commercial banks for borrowing funds from it. The question is how does the Discount rate affect the overall level of interest rates in the economy ...
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Why did the Bank of England cut the base rate so low in 2009? And what didn't happen that made them keep it low until 2020?
I'm aware there was a financial crisis in 2008 and because of that crisis the BoE cut the base rate to very low. For example in 2008 the base rate was 5%, but by 2009 it was 0.5%.
But why did the BoE ...
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How did interest rates work under the gold standard?
Say under the gold standard \$1=1 gold unit. And the interest rate is 10%. Does this mean if I deposit 1 dollar at the bank at the end I would end up with $1.1 which means in essence I would actually ...
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How to calculate generated interests while having two different nominal rates compunded into a single quarter
I would like to calculate the interest generated from an investment within a time period of 8 months. The bank manages an interest rate of 3.5% p.a. for six months, and the last two months is 1%. The ...
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How is natural interest rate estimated?
I'm working on a project in which I need to describe, compare and contrast various models of natural interest rate.
My team is planning to discuss the Laubach-Williams model, DSGE model, Structural ...
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The effects of interest on supply and demand
It is clear to me that increasing the interest rate should make loaning money more expensive, therefore money more scarce, and that that would curb aggregate demand, and that's what I recall I learned....
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What happens if the volatility in the equity market increases? Does interest rates move up or down?
I think both can happen and here is my reasoning. Please correct me if I am wrong.
During times of increased volatility in the equity market, investors adopt a more risk-averse approach and gravitate ...
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When Cathie Wood says the Powell has 20x rates vs Volker 2x rates in 1981, is this the right way to look at it?
Cathie Wood regularly says the FED today gone too far with rate rises, saying they have raised rates 20 times from their 0.25% lows in 2020, where as in the early 1980 Volcker only doubled rates from ...
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If interest rate policy were to disappear tomorrow, how would we/could we manage inflation?
Inflation has obviously become a big issue over the last couple of years again, and I've read people complaining that the inflation comes from increased prices of energy imports, (namely oil and gas), ...
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Relationship between Interest rate and commodity prices
In section 4 of this article
The Russian Rouble's spectacular crash Oil. Gas. Wheat. Iron. Cobalt.
Russia’s status as a commodity superpower, and the high yields this
can generate, has made the ...
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China interest rates
"the PBoC said it would keep interest rates below the nominal GDP growth rate as a way of maintaining debt sustainability. But this only makes debt "sustainable" by implicitly ...
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Empirical relation between interest rate and stock market performance
Disclaimer: Originally I asked this question on the personal finance site (see here) where it was (rightfully) closed since it does not directly relate to personal finance but is rather a general ...
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If the interest rate is increased to limit inflation, doesn't that increase the money supply?
If the interest rate is increased to limit inflation, doesn't that increase the money supply? Because one year later, 5% of the total bond will need to be created and put into circulation.
This, in ...
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How to find the equilibrium amount of $p_{2}$ in terms of $p_{1}$?
There are $100$ tons of crops remaining to supply for the two months. The crop holders consider whether to sell crops now or one month later. Holders face the demand curve of each period as below:
$...
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Why raise UK interest rates to control inflation Now - May 2023?
The usual reason given for raising rates to control inflation is that it reduces consumer spending, increases borrowing costs and slows the economy.
However, in an environment where the inflation has ...
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interest rate risk vs duration risk?
Is there a difference between interest rate risk vs duration risk? I feel as though I have heard them used interchangeably but I don't know if there is any distinguishing factor between the two.
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How to explain negative correlation betwen FED funds rate and dollar volatility?
actually I am looking into monthly price data on bitcoin and the us-dollar (USD/EUR) and the monthly federal funds rate.
I calculated the volatility by:
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In a New Keynesian model, why do firms not take the interest rate into account when discounting their future profits?
I understand that firms usually discount future prices using the discount factor $M_t = \beta^t u'(c_t)$. Both the presence of $\beta$ and $u'(c_t)$ make sense to me as they reflect the (im)patience ...
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What's wrong with a deflationary economy?
It is my understanding that central banks around the world strive to achieve a stable inflation rate of around 2%. It is claimed that this is because steady low inflation helps contribute to the ...
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Why have bank deposits gone down with rising interest rates?
From an opinion piece in the Washington Post:
"Since the Federal Reserve began to raise rates about a year ago, deposits leaving the banking sector have totaled nearly $1 trillion".
Why ...
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Why do sticky prices make output partly determined by demand?
First time going through the basic new-keynesian model and i understand the math behind it okay. I also get that output being partly demand determined is the transmission mechanism for monetary policy ...
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Decreasing Policy Rates but Increasing Banking Rates on Loans
In Turkey, we have been experiencing a chronic problem: Inflation. Since first quarter of 2021 central bank has been decreasing the policy rate, which is related to a political situation. However, ...
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Are there terms to separate two different notions of percentage increase?
Say someone owns 30% of the shares of a company. Then suppose that they increase their number of shares by 50%. This last sentence is ambiguous. It could mean that they increase their number of ...
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impact of a gradual adjustment of the federal funds rate
Although the Federal Reserve has been raising interest rates for about 1 year, and inflation has slowed down, prices are not going down much. What are the benefits of raising rates slowly? Obviously ...
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Federal Funds Rate & Reserves Market Contradiction
Edit: I do understand this isn't how things work anymore, since we are in a "Ample-Reserves Framework" and the quantity of reserves no longer makes a difference that much and it is primarily ...
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Effect of QT and higher bond yields simultaneously
I don't know much detail about how banking is working so you will have to bear with any misinformation or false conjecture I may have.
The US government wants to control inflation in 2023. The Federal ...
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Relationships between several economic concepts, and chatGPT's explanation [closed]
Sadly I have so little knowledge of economics that I can barely read the news these days. Answering my questions the old fashioned way (via Google) tends to confuse me more. So I asked chatGPT, but I ...
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perfect level of interest rates
The FED in the US has a target inflation rate and target employment. Given that mandate they set the rates which drives the rest of the interest rates on bonds, mortgages etc. Currently they have been ...
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How can Real GDP increase while Money Supply remains fixed?
I'm studying the Money Market Graph with it's Money Demand and Money Supply curves. In the classical model they teach the Money Demand curve as sloping down to the right while the Money Supply curve ...
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In the US, if the Fed stops hiking the Fed Fund Rate, how does it affect inflation rate?
I know if the Fed continues to increase the Fed Fund Rate, inflation eventually goes down. But what if the Fed stops hiking the current Fed Fund Rate, how does it affect current inflation rate if the ...
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Taking a loan to pay another loan with the same interest
I had a discussion with family members about how taking a loan to pay another loan with the same interest is basically wasting money and they didn't agree.
To make things clearer, say loan 1 is 100 ...
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How to use Leibniz Rule of integration to find interest rate in Expanding Variety model
I'm studying growth theory from Barro/Sala-i-Martin and I stumbled upon a problem where some more advanced level of calculus is required in chapter 6 (Models with Expanding Variety: p. 294 eq. 6.18).
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Why not increase tax instead of interest rate rises?
To control inflation and reduce consumption, the Central Banks increase interest rates (eg UK). Wouldn't it be more beneficial (improved public services and infrastructure) to increase consumption ...
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Expected vs actual inflation and the real debt burden
The real rate of return is given by:
1+r=(1+i)/(1+π)
and it can easily be shown that:
1+r ≈ i-π+1 so that r ≈ i-π
This can be used to calculate real rates of return, or equivalently the real debt ...
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Real debt burden
Many economists believe real interest payments-to-GDP is a superior measure of debt service burden than nominal interest payments-to-GDP. My question is why we divide real interest payments by nominal ...
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Difference between interest rate and rate of return (Keynes)
For Keynes the economy's interest rate is defined from the equality between money supply and demand. However, he also defines the rate of return on assets (which in equilibrium would all be equal). ...
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Current US inflation rate is 7.1% and Fed vows to reduce it to at least 2.00%, how long could that possibly take?
If the Fed keeps raising interest (e.g. 0.5%) and vows to reduce interest rate to at least 2.00%, how long could that possibly take? Thanks.
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How would one arbitrage a mispricing in interest rates and forex rates?
If you have a Japanese bond with a return of 2%, and an American bond paying 5%, but both current and forward exchange rates are 100 yen to 1 usd, how would one take advantage of this opportunity to ...
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Present value of profits
In Shapiro, C. (1983). Premiums for High Quality Products as Returns to Reputations. The Quarterly Journal of Economics, 98(4), 659. doi:10.2307/1881782, they assume the one-period interest rate is $r=...
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