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Lecture Money and capital markets: Chapter 7 – Peter S. Rose, Milton H.Marquis

The purpose of this chapter is: To examine how the issuer and time to maturity affect the price of a bond, and to use our knowledge to interpret fluctuations in a broad variety of bond prices. | Chapter 7 Inflation & Deflation, Yield Curves, and Duration: Impact on Interest Rates and Asset Prices Learning Objectives To learn what inflation is and how it can impact interest rates and the prices of financial assets. To understand the greater concern today over deflation and how it may affect the economy and financial system. To see how yield curves arise and explore the ideas about what determines the shape of the yield curve. Learning Objectives To discover how yield curves can be a useful tool for those interested in investing their money and in tracking the health of the economy. To look at the concept of duration and see how it can be used to assist in making investment choices and in protecting against the risk of changes in interest rates. Introduction Why are the interest rates on U.S. Treasury bills, Treasury bonds, municipal bonds, corporate bonds, personal loans, etc. so different from one another? Understanding the factors that cause interest rates to differ | Chapter 7 Inflation & Deflation, Yield Curves, and Duration: Impact on Interest Rates and Asset Prices Learning Objectives To learn what inflation is and how it can impact interest rates and the prices of financial assets. To understand the greater concern today over deflation and how it may affect the economy and financial system. To see how yield curves arise and explore the ideas about what determines the shape of the yield curve. Learning Objectives To discover how yield curves can be a useful tool for those interested in investing their money and in tracking the health of the economy. To look at the concept of duration and see how it can be used to assist in making investment choices and in protecting against the risk of changes in interest rates. Introduction Why are the interest rates on U.S. Treasury bills, Treasury bonds, municipal bonds, corporate bonds, personal loans, etc. so different from one another? Understanding the factors that cause interest rates to differ is an indispensable aid to the investor and saver in choosing financial assets for a portfolio. Inflation and Interest Rates Inflation refers to the rise in the average level of prices for all goods and services. 7 Inflation and Interest Rates In recent years, the U.S. inflation and interest rates appear to be fairly strongly correlated. Source: U.S. Department of Commerce and Board of Governors of the Federal Reserve System Inflation and Interest Rates Nominal and Real Interest Rates In general, lenders will attempt to charge nominal rates of interest that give them their desired real rates of return on their loanable funds based upon their expectations regarding inflation. nominal rate = published or quoted rate real rate = rate measured in terms of the actual purchasing power Inflation and Interest Rates The Fisher Effect In a 1896 classic article, economist Irving Fisher argued that expected nominal interest rate = expected real rate + inflation premium + (expected real rate .