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Determinants of Interest Rates :star: - Coggle Diagram
Determinants of Interest Rates :star:
Loanable Funds Theory
Equilibrium interest rate as a result of the S. and D. of loanable funds
Supply of Loanable Funds
Supplied by the household sector (consumer sector), depend on
General level of interest rates
Their total wealth
The risk of securities investments
Their immediate spending needs
Higher interest rate - Higher Loanable Funds
Supplied by GOVT
Foreign investors
Similar to domestic suppliers of loanable funds
Demand for Loanable Funds (Respectively to S)
Equilibrium Interest Rate
Term Structure of Interest Rates
UNBIASED EXPECTATIONS THEORY (UET)
If this equality does not hold, an arbitrage opportunity exists
Interest rate term
2 subscripts:
xRy
x:
the
period
in which the security
is bought
y:
the
maturity
on the security (often year life)
MARKET SEGMENTATION THEORY
LIQUIDITY PREMIUM THEORY
Determinants of Interest Rates
for Individual Securities
INFLATION
REAL RISK-FREE RATES
DEFAULT OR CREDIT RISK
LIQUIDITY RISK
SPECIAL PROVISIONS OR COVENANTS
TERM TO MATURITY
Time Value of Money and Interest Rates
LUMP SUM VALUATION
ANNUITY VALUATION
TIME VALUE OF MONEY
Nominal interest rates (or just interest rates)
Interest rates actually observed in financial markets.
Directly affect the value (price) of most securities in money & capital markets both at home and abroad.
FORECASTING INTEREST RATES