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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34 views

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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PPP and real exchange rate [closed]

Can someone help me with this question. It shoul be easy but i am not able to solve any of them. Thanks
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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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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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881 views

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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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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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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How does buying more of a foreign currency devalue a nation's currency?

If a country wants to devalue their countries, why does buying more of a foreign countries currency devalue their currency? I was reading the top answer from this question How does a country devalue ...
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Why loans/debt can cause inflation?

I learned that inflation can be a result of more loans or debt. When there are too much borrowers in the country, people will have more money to spend and the amount of products is the same so prices ...
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What would happen if fractional banking was phased out? [duplicate]

There are negative interest rates now and into the foreseeable future. This must mean there is too much money being offered compared to the demand for loans. Fractional banking acts as a multiplier on ...
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How does interest rate impact exchange rate?

When I’m using the forward exchange rate formula based on non-arbitrage theory, it tells me that a positive interest rate spread (i_domestic > i_foreign)would cause the forward exchange rate(units of ...
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Why did the EUR/USD go down immediately when the Fed cut interest rate?

I was following the Fed’s decision on interest rates. I thought if there is an interest rate cut, the EUR/USD will go up but contrary to that it went down on 07/31/2019 immediately after the decision ...
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Why don't governments exploit negative interest rates more than they currently do?

At the moment many governments, such as Finland's, are able to borrow money at negative interest rates. My question is: why don't they borrow as much money as possible while interest rates are ...
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Effect of interest rates on currencies

I always understood that high interest rates in country A attract investors and cause the currency to appreciate. However, the interest rate parity theory suggests that high interest rates weaken a ...
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Negative interest rates and banks

What effects do negative interest rates from a central bank have on banks? What are the takeaways from negative rates in Europe and Japan?
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Relationship between Growth in Purchasing Power and Real Interest Rate equations

My textbook gives these two equations including the real interest rate and says that the second equation (b) can be arrived at from the first (a), but doesn't explain how. rr = Real Interest Rate, r =...
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Gross interest rate ($R$) v. Net interest rate ($R-1$)

I am reading a macro-finance article that deals with asset financing. While it defines the gross interest rate to be $R$, it defines the net interest rate to be $r\equiv R-1$. In equilibrium, the ...
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Why are mortgage rates in USA so high compared to Europe?

What are the main reasons of high mortgage rates in USA compared to central Europe? In central Europe mortgage rates are about 75%-100% lower than in USA. For data on mortgage rates see: https://www....
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Why do prices go up when the central bank increases money supply?

From my understanding, when the money supply curve shifts to the right, interest rates go down, it follows that the price level decreases and the prices should go down? Thanks in advance.
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Relation between Inflation and Bank deposit interest rate?

I have my own novice theory that bank pays you interest for your deposit so that the value of principal amount remains the same in the future (as due to inflation, the price of the commodity will rise ...
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Calculation of Inflation and purchasing power

kindly I'm stuck in this problem instead of many attempts through net present value and other discounted cash flow methods, some one could give me a detailed information and answers on this problem : (...
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Is charging of interest inherently rent seeking?

Is the real interest rate component of interest (excluding default risk premium, etc) inherently rent seeking? The real interest rate is typically considered to repay the opportunity cost of lending ...
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Uncovered Interest Rate Parity Assumptions (UIRP)

When learning about UIRP i have naturally come across the assumptions under which it may hold. However i am having trouble understanding the role of these assumptions and what the actual consequences ...
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Is a loan lent with a rate under the inflation rate free money?

Suppose we have an inflation in a country with an annual 2% and we get a loan for an annual 1% (real interest). Is the money we receive free? This is a common practice in some European countries, ...
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Does commercial paper usually carry a higher yield than corporate bonds? Why?

In Banking: A Very Short Introduction, Goddard and Wilson write: [Commercial paper] usually carries a higher yield than corporate bonds. But aren't corporate bonds longer term than commercial ...
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Extraction of Inflation Expectation from bond yields

In my introductory monetary economics course we have learned that inflation expectations can be calculated by comparing yields on index-linked and conventional bonds of equal maturity and assuming a ...
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Why is an inverted yield curve NOT a good predictor for recessions except in the US?

I am trying to better understand the mechanism (if there is one) behind an inverted yield curve predicting - or causing, as some would argue - a recession. In order to do that, I'm trying to ...
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Why are the Fed's goals often described as the “dual mandate” and not the “triple mandate”?

The Federal Reserve Act Section 2A states: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit ...
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Tax Cuts Affect on Economy?

If we look at the equation for national Savings = S(priv) + S(pub) = [Y-C+Tran-T] + [T-G-Tran] = Y - C - G . We see that Tax falls out of the equation. Therefore, does that mean changes in taxation ...