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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36 views

Why does the nominal interest rate equal 25% in this problem, instead of 16.4%?

My reasoning: The nominal interest rate = the real interest rate + the expected inflation rate. We need to calculate the nominal interest rate. We know the expected inflation rate, so the only problem ...
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“Consumption lowers investment” mankiw explanation

I am teaching myself macroeconomics and I am stuck on this reading Mankiw: Because the economy’s output is fixed by the factors of production and the level of government purchases is fixed by the ...
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Monetary policy: increasing interest rate

What happens to the quantity of treasury bonds when central bank sells short-term bonds? The overall question for the assignment is: Suppose that the central bank of a country decides to increase the ...
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FDI, FPI relation with interest rates

I understand how a rise in interest rate might lead to an inflow of capital into debt securities, however wouldnt these Foreign Portfolio Investments (FPI) remove their funds from equity. And for ...
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Can the Federal Reserve's Quantitative Easing negative interest rates?

When I did my B.A. in economics, I never thought about extending $L(i)$ to negative y-axis. What if a central bank like the US Federal Reserve now quantitiatively eases more and shifts $\dfrac{M}{P}$ ...
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Why is the Dollar Index strong after the Fed dropped the Fed Fund Rate?

I have a query about the current forex market. In 16 March 2020, the US Federal Reserve Bank announces to cut the interest rate to 0%. This move supposedly weaken the Dollar Index, but why for a ...
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Why does global suspension of economic activity result in catastrophic loss/debt?

Covid-19 has forced a suspension of at least 50% of financial transactions and business activities. Materially, not much has been lost: consumables have been spared, equipment is dormant, ...
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How to Calculate Bond Yields

According to Bloomberg, the coupon rate on a 10-year UK government gilt is 4.75%. Bloomberg also states that the yield is currently 0.47%, and the market price £144.57. The UK Debt Management Office (...
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Understanding Bond Yields

According to Bloomberg, the coupon rate on a 10-year UK government bond is 4.75%. Bloomberg also states that the yield is currently 0.55%, and the market price £143.51. But if the following formula ...
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How does the central bank's purchase of the domestic currency lead to an increase in the domestic interest rate?

Consider the following scenario: The Hong Kong Dollar has been pegged to the US Dollar since 1983. If, for example, the US tightens monetary policy by raising interest rates, this will cause ...
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Why do banks keep vault cash instead of depositing all reserves at the central bank?

In what way to commercial banks benefit from keeping some of their excess reserves in the vault as opposed to depositing all of their excess reserves with the central bank (assuming the central bank ...
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What happens to Interest rate if the money supply is fixed?

With the increase in Money supply, the nominal interest rate tends to increase. But what happens if the supply of money is fixed? What happens to the Interest Rate?
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After a permanent shock what would happen to the interest rates?

If there was a permanent negative population shock that reduced the population of the young by x. What would happen to interest rates under an OLG model?
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How to reconcile fact that “real interest=nominal interest - inflation” with prediction of the interest rate theory about expensivity of loans?

According to the interest rate theory higher price level will lead to following chain of events in the short run: Marginal propensity to save will decrease(ratio of spending/saving will change, people ...
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Interaction between productivity growth and interest rates

Isabel Schnabel, Member of the Executive Board of the European Central Bank point at the interview out "The real interest rate (...) emerges from the economy’s growth potential in the long run.“ https:...
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Liquidity Trap Question? Return to equilibrium

As far as I inderstand a liquidity trap occurs when increasing the money supply is not able to stimulate the economy because people prefer hoarding the cash rather then investing in debt securities ...
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What is the best observable proxy for the instantaneous risk-free market interest rate?

I am exploring a number of different models using daily data, of the US economy, and am trying to gather up observable proxies for some of the most important macro and micro variables, and surveying ...
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How do I find monthly domestic interest rates for Panama for the early nineties?

I am looking for monthly domestic interest rates for Panama from before December 1996. Any type of interest rate will suffice - deposit rate, money market rate, saving rate, lending rate. The time ...
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Consistency of Textbook Problems Involving Discount Rate

A book on Theory of Interest explains about the discount rate as a rate when the interest is paid at the beginning of period: If a person borrows \$100 for 1 year and with discount rate of 10% ...
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China benchmark rates and Shibor relationship (chart)

I made the chart below for an assignment on People's Bank of China monetary policy during the financial crisis. The problem is that it got me very confused about the relationship between these ...
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Lending and interest rates

It states in my textbook that as interest rates are lowered it says lenders are the ones who gain from the decrease in interest rates. But isnt this not true? As lower interest rates imply the amount ...
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Negative interest rate on bond yeild

In Black Scholes model r is defined as risk free interest rate. What I have understood is that risk free comes from the yields on sale of government bonds. My ...
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1answer
36 views

“risk free interest rate” in Black Scholes

In Black Scholes model r is defined as risk free interest rate. Could you please explain what is risk free? Is it same as ...
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Why did foreigners keep buying Swiss francs at -41% (not a typo) interest rate in the 1970s?

A Bloomberg (opinion) piece notes In January 1975, the Swiss government held an emergency meeting and then took the extraordinary step of slapping a 41% annual penalty on foreign deposits. But even ...
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What limits central banks from setting highly negative interest rates?

What limits central banks from setting highly negative interest rates if needed? Is it only that people can take out a lot of cash and put it in a vault, or are there other reasons? If we had removed ...
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What happens to interest rates when they are already at (near) zero and the stock market crashes?

Let's say the global stock market crashes in the coming months (it's currently at an all time high in the western world). What happens to interest rates? "Usually", as I understand from my absolute ...
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When does the interest rate parity curve shift?

Given the IS LM IRP model, can somebody tell me the difference for when there is a movement along the IRP curve and when there is an actual shift in the IRP curve?
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26 views

After how many years will loan be paid with constant payment

I'm solving the following problem: A young couple took a loan 100 000 USD. For the first 5 years they pay 5000 USD yearly. After 5 years they pay 10 000 USD yearly. The interest rate is 5%. ...
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How does exchange rate change with respect to interests?

If the central bank raises intereat rates, isn't the money supply now less and the exchange rate is greater? I have run into opposite statements and dont know how to approach this problem. Thanks in ...
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What does it mean to “kickstart the economy”?

This answer claims that: the central banks have been lowering and lowering [interest] rates, desperate to kickstart the economy, but it's not been working What does "kickstart the economy" mean ...
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Cash and negative interest rates

Recently, I read an IMF blog on how the negative interest rate policy can be implemented feasibly here. I don't really understand what they are saying in this paragraph: When cash is available, ...
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How to borrow at risk free rate

When learning about derivatives, we learnt about risk-free hedges and portfolios. However, one of the concepts was about borrowing and lending at the risk free rate. Now, for lending it's as simple as ...
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Decreasing interest rate effect on economy

Central banks decrease sometimes the interest rate by saying this has positive effect on the economy and the development of countries. One of the reasons is that it can be easier to do investments (...
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How does a government implement negative interest rates in practical terms?

We usually understand interest rates from a very simple story "you went to a bank ans asked to borrow money, the bank agrees but requires you to return an extra amount be the end of the loan term, ...
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Why charge higher interest rates to poorer customers?

Consumer loans/credit charge different rates depending on the individual's risk. In particular, it charges more to poorer individuals. Whilst this seems to make sense from a risk perspective, there ...
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Why do commercial banks buy government bonds at negative interest rates instead of keeping cash?

I know commercial banks need to meet liquidity requirements, but why would they choose to invest their money in an instrument that is guaranteed to give them a negative return, instead of just keeping ...
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demand for money

I am currently studying the demand for money by Blanchard. this model assumes that the amount of money held is basically related to transaction levels and the the attractiveness of bonds. i.e.: ...
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Forward exchange rates and inflation

Looking at forward rates, the exchange rate for the currency with the higher interest rate gets worse over time. This makes sense or else there would be an arbitrage opportunity to borrow in the low ...
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Understanding annualized percentage rate of interest, real interest and nominal interest rate

I am having issues finding a solid example online that explains how the concepts surrounding the word interest relate to each other. I am after an example that presents a concise mathematical formula ...
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How do major global events interact with debt cycles?

I recently watched Ray Dalio's video on how the economy runs on short/long term debt cycles. However I was wondering how other major events impact economic growth: How does the short and long term ...
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Interest rate, bond problem

I am trying to solve the following problem: Debtor issued a bond on 20 000€ (including interest rate) with maturity rate of 8 months and interest rate of 8% per annum. Month later, the creditor ...
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Does 0% interest rate mean the minimum value of a currency?

I would like to know if there are other factors that can devalue a currency. I think the effect of the negative interest rates will not be much greater than the 0% interest rate because simply a very ...
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The Fed Lowered Interest Rates, Are they going to buy Bonds?

I originally asked this question on personal finance/money because I didn't know that this exchange site existed. link to same question at person finance/money. Someone on that site mentioned that it ...
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LM curve: How interest rate is changing without OMOs by the central bank?

The following is the gist from chapters - 3, 4 & 5 dealing with IS-LM model from Macroeconomics, Blanchard & Johnson, 6th edition. Equilibrium in the financial market implies an increase in ...
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The effect of Monetary Policy on Asset Price Inflation

My macroeconomics professor told the following: A decrease in interest rate causes that consumers rather spend their money on investments (stocks, houses) than put the money on the bank, and the ...
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1answer
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What would mortgage payments be if monthly payments were constant in real terms?

From the Wikipedia: The fixed monthly payment for a fixed rate mortgage is the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of ...
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Calculating the amount paid for a loan in today's dollars

So I was trying to figure out the amount paid for a loan in today's dollars using two different methods but they give me different results. I was hoping that someone could explain which method is ...
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1answer
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How to calculate the risk-free rate of cryptocurrencies?

For a conference I need to show the Sharpe ratio's of bitcoin portfolios using different trading strategies. To calculate the Sharpe ratio, I need the Bitcoin's risk-free rate. Risk-free rate for ...
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Interest rate - Price of Credit vs Price of Money

I read somewhere that interest rate as the price of money is wrong but rather it is the price of credit. Can someone elaborate and explain what this means?
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Relationship b/w consumption & increase in interest rate

Please help me clarify this- Case 1 - If interest rates increase then people will save more to reap the benefits and will cut down on their consumption(C) so Consumption will fall. Case 2 - Due to ...

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