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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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1 answer
104 views

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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1 answer
94 views

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 ...
2 votes
2 answers
242 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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2 answers
1k 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 ...
1 vote
1 answer
90 views

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 ...
3 votes
3 answers
172 views

Why do stock returns seem to be uncorrelated with interest rate?

Since expected return of stock is risk-free rate plus risk premium, intuitively they should be correlated. Of course the size of risk premium is not constant, but it's hard to imagine why risk premium ...
2 votes
2 answers
605 views

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 ...
2 votes
2 answers
234 views

MMT suggests that taxation can be used to fight inflation. What would be an argument against this suggestion?

Yesterday, I watched the MMT documentary Finding the Money. Modern monetary theory (MMT) provides an alternative viewpoint that sounds to me consistent with standard economic theory. Deficit spending ...
1 vote
2 answers
77 views

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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5 answers
2k views

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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1 answer
312 views

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 ...
2 votes
1 answer
77 views

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....
3 votes
2 answers
214 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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Optimal monetary policy in IS-MR-PC model

I am trying to work out a formal solution for the central banks' problem in the slightly modified IS-MR-PC model (popularized by Carlin & Soskice (2015) and Carlin & Soskice (2023) textbooks). ...
2 votes
1 answer
105 views

How much money is owed to the Fed?

The Fed maintains its target interest rates by "lending" money to commercial banks: When the actual federal funds rate is higher than the target, the Federal Reserve Bank of New York will ...
1 vote
1 answer
80 views

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 ...
2 votes
1 answer
111 views

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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2 answers
55 views

Bond Prices, Interest rates, Demand for bonds

I know about the inverse relationship between bond prices and interest rates. However, when we talk about Liquidity Preference Theory, there we mention that an increase in interest rates leads to more ...
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Chan Park - Fundamentals of Engineering economics - 1st edition - Chapter 5 - Present value - 5.8

hope I could ask some help around here. I'm working with Chan S Park book Fundamentals of Engineering Economics, 1st edition. I'm in the problem 5.8, page 171. Which states: ``Your firm is considering ...
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1 answer
75 views

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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1 answer
37 views

How do Fiscal and Monetary policy interact intuitively?

Suppose there is a recession, and the government aims to provide a fiscal stimulus. Assuming an independent CB, the government will issue treasury bills to borrow and finance the stimulus. Consider ...
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1 answer
51 views

If high interest rates cause strong currencies what do Argentina and Zimbabwe have currency collapse?

These two countries like Argentina have massive interest rate, over 50%, yet nobody can claim the argentinian peso is stronger. In fact its like 1000 to the dollar and was much stronger before. So do ...
2 votes
1 answer
5k views

Effect of risk premium on the money demand (LM curve)

In short, I'm having problems understanding the LM curve, as the explanation given by the picture is for me, the 4th row is counter intuitive. When risk premium increases it causes the interest rates ...
1 vote
1 answer
50 views

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 ...
2 votes
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Spanish Interest Rates pre-1973

Does anyone know where I can find data on any Spanish interest rates (legal, interbank, t-bill, money market etc.) pre-1973? Bank of Spain, IMF, World Bank, and FRED seem to only go back to 1973 at ...
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2 answers
210 views

Uses of simple interest

Recently I started to read again Brealey & Myers's "Principles of Corporate Finance" (an older edition I hold it since I attended to the university course on Economics and Corporate ...
2 votes
1 answer
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Does the discounted dividend model assume a stock underperforms the risk-free rate?

I'm trying to understand intuitively why the stock market as a whole has outperforms the risk-free rate over time. I started by looking at the discounted dividend model which is one of the few things ...
0 votes
1 answer
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Duration - why do we measure it the way we do?

Let B(y) be the bond price as a function of yield to maturity. If I understood correctly, duration can (roughly) be understood as a measure of the change in $B in response to a change in y. What I don'...
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Finding the equilibrium interest rate

Let's say there are only two countries in the entire world, Argentina and Chile, and there is free trade between them. The aggregated investments in both countries are $I^A$ and $I^C$ that are both ...
1 vote
1 answer
64 views

How to model discontinuities in sovereign debt interest rates?

For some emerging economies, the interest rates on sovereign debt are sometimes highly volatile: undergoing periods of stability then sharp upward/downward jumps. In continuous-time models, however, ...
0 votes
1 answer
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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 ...
-1 votes
1 answer
149 views

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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1 answer
348 views

Money creation - why do we need deposits and why do banks give out money? [duplicate]

Currently studying elementary economics but there's this one concept that I'm struggling to wrap my head around at the moment: money creation. The way I understand it, banks can create money "out ...
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0 answers
40 views

Why is eurodollar future so popular

It's well-know that eurodollar futures contracts are the most liquid contracts in the world. Traders use them to express views on interest rates or hedge interest rate risks. My questions is why are ...
4 votes
3 answers
538 views

Loans that don't have to be paid back (only the interest)

A normal loan has to be paid back with interest. Every now and then there are interest-free loans where only the loan has to be paid back but no interest, e.g. among relatives or friends, but also as ...
0 votes
1 answer
56 views

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 ...
0 votes
1 answer
68 views

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 ...
2 votes
2 answers
69 views

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 ...
0 votes
1 answer
145 views

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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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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1 answer
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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 ...
0 votes
1 answer
74 views

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 ...
2 votes
1 answer
84 views

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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2 answers
154 views

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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1 answer
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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 ...
2 votes
0 answers
41 views

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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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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