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As Brian mentions in his comments this is because in standard models when people make intertemporal decisions they take inflation into the account. Take the following example: You have a rational utility maximizing person who makes decision between consuming $\\\$100$ today or saving it for later consumption. For simplicity lets assume discount factor is ...


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Edit this answer was written for the original question, before user completely edited whole question to something completely different and unrelated to original question for some reason: How is it that the coupon rate is higher than the interest rate? How can the coupon rate be higher than the interest rate? Doesn't that mean that after one year, you're ...


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From a real world perspective, “interest rate parity” always holds - so long as you take into account the cross-currency basis swap spread. (Basis swaps are typically ignored in simple academic models, but are important for cross-currency funding). Forward points are set based on the theoretical relationship, with a bid-offer spread. Any market maker that is ...


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There are practical problems with having 'real loan' even though theoretically they would actually be desirable (as paper "The Impact of Inflation on Long-Term Housing Loans" by Tschach, Ingo E.) if they would be practical. We do not know what the current inflation is. This statement is simply incorrect: Of course we will need to know the ...


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There is an arbitrage argument for UIP because under UIP forward rate must be equal to expected exchange rate so the same arbitrage arguments from CIP can be extended to UIP (under its strict assumptions). You will find it in most international macroeconomics or finance textbooks. For example, according to Nelson Mark's International Macroeconomics and ...


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This is because bond prices increase when interest rate falls. A general bond pricing formula can be expressed as as a discounted stream of future cash flows from the coupon and the value of the bond itself. Hence we have: $$ P = \sum^T_{t=1} \frac{C_t}{(1+i)^t}+\frac{M}{(1+i)^T}$$ Where $P$ is the price of the bond, $C$ is the coupon $i$ the interest rate, ...


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What determines interest rates? Let's try to understand the emergence of interest rates from first principles. We'll imagine an island inhabited only by Robinson Crusoe and Friday. For sustenance, they pick coconuts - the only food source available to them. Each coconut can either be consumed immediately or saved up for future use. One day, Crusoe does not ...


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The natural interest rate is theoretical, so it can only be estimated. With regard to the drivers of interest rates, Kaplan (head of the Dallas Fed) explains: The neutral rate can be measured for different time horizons. Estimates of the “shorter-run” neutral rate are typically influenced by nonmonetary drivers of near-term GDP growth such as changes in ...


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Level (also called stock) variable, is a variable that measures something at a given point of time. For example, measuring GDP in 2017 would be a level (stock) variable. Flow variable is a variable that measures the rate of change in the stock over time. For example, if GDP growth (which measures flow of GDP) was $10\%$ in 2017 that means that the level/...


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The bond market is a market, albeit following the lead of the central bank at the short end. The currency market is a market. The simplest and crudest version of the Efficient Markets hypothesis is that it is difficult to “beat a market” using a simple rule. The argument is that if such a simple rule exists, everyone would do it, causing prices to shift. (...


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Sovereign rates in developed countries represent the credit risk-free curve. What maturity on the curve you want to choose is an analytical choice. The natural rate is in reference to a risk-free curve, and so should align with the sovereign curve. Also, “Natural rate” is somewhat dated at this point, the preference is to use a more neutral term like r*.


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In economics, as opposed to finance, people often use discount factor and interest rate sometimes interchangeably. This is specially when defining inter-temporal preferences. The idea stems from the fact that discount rate and interest rate measures a similar kind of trade-off: current utlity/wealth vs future utility/wealth. Interest rate, simply put, is the ...


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Overview: interest rate is a broad term, discount rate is a specific type of interest An interest rate is a very broad term that applies to a host of assets. Interest rates are paid on mortgages, bonds, CDs, savings account, etc. The discount rate is a specific type of interest rate that applies to the rate of interest charged to banks borrowing from a ...


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In the US, a fail penalty is applied on the failure to deliver securities in a US Treasury or Agency transaction. This applies to any trade in these securities , including a simple cash trade , or the opening leg of a repo, or the closing leg of a repo. The intent of the system , first introduced in 2012, was to clean up fails in the Marketplace by ...


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I remember making myself the same question when studying those models in Mankiw's book. The answer I arrived is that from the point of view of the model, the Central Bank's policy is reflected in the money supply variable, and the interest rate variable is an abstraction that represents the main interests rates in an economy that are given by the equilibrium....


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The length of the CD is not relevant. The point of APR and APY numbers is that they annualize the rate you pay over a time frame that may be smaller or larger than a year. What matters is the compounding frequency. CDs generally compound on either a daily or monthly basis, so n will be 12 or 365, depending on the CD. Is this a real-life problem or an ...


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