Term
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Definition
| - market interest rate is determined by the factors that control supply of and demand for loanable funds |
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Term
| household demand for loanable funds |
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Definition
| - inverse relationship between the interest rate and the quantity of loanable funds demanded |
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Term
| business demand for loanable funds |
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Definition
| - depends on number of business projects to be implemented; more demand at lower interest rates |
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Term
| government demand for loanable funds |
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Definition
| - interest inelastic - insensitive to interest rates; expenditures and tax policies are independent of the level of interest rates |
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Term
| foreign demand for loanable funds |
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Definition
- a country's demand for foreign funds depends on the interest rate differential between the two
- the greater the differential, the greater the demand for foreign funds
- the quantity of US loanable funds demanded by foreign governments will be inversely related to US interest rates |
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Term
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Definition
- households are largest supplier, but some supplied by government units
- more supply at higher interest rates
- supply by buying securities
- effects of the fed - by affecting the supply of loanable funds, Fed's monetary policy affects interest rates
- aggregate supply of funds |
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Term
| impact of economic growth on interest rates |
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Definition
| - puts upward pressure on interest rates by shifting demand for loanable funds |
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Term
| impact of inflation on interest rates |
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Definition
| - puts upward pressure on interest rates by shifting supply of funds inward and demand for funds outward |
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Term
| impact of monetary policy on interest rates |
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Definition
| - when the Fed reduces the money supply, it reduces the supply of loanable funds, putting upward pressure on interest rates |
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Term
| impact of the budget deficit on interest rates |
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Definition
| - crowding-out effect - given a certain amount of loanable funds supplied to the market, excessive government demand for funds tends to "crowd out" the private demand for funds |
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Term
| impact of foreign flows of funds on interest rates |
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Definition
| - interest rate for a certain currency is determined by the demand for funds in that currency and the supply of funds available in that currency |
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Term
| what future demand for loanable funds depends upon |
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Definition
- foreign demand for US funds
- household demand for funds
- business demand for funds
- government demand for funds |
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Term
| what future supply of loanable funds depends upon |
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Definition
- future supply by households and others
- future foreign supply of loanable funds in the US |
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Term
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Definition
- the ease of conversion to cash without loss of value
- the lower a securities liquidity, the higher the yield preferred by investor |
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Term
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Definition
- investors are more concerned with after-tax income
- taxable securities must offer a higher before-tax yield |
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Term
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Definition
- maturity dates will differ between debt securities
- the term strucutre of interest rates defines the relationship between term to maturity and the annualized yield |
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Term
| explaining actual yield differentials |
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Definition
| - small differentials can be significant |
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Term
| yield differentials of money market securities |
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Definition
- securities: commercial paper, certificates of deposit, bankers acceptances
- yields are just slightly higher than the risk-free T-bills |
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Term
| yield differentials of capital market securities |
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Definition
- municipal (munis) bonds have lowest before-tax yield
- treasury bonds may have higher before-tax yield than munis but have lowest after-tax yield
- corporate bonds may have highest yields |
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Term
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Definition
| - term structure is determined solely by the expectations of future rates |
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Term
| impact of an expected increase in interest rates |
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Definition
| - leads to an upward sloping yield curve |
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Term
| impact of an expected decline in interest rates |
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Definition
| - leads to a downward sloping yield curve |
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Term
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Definition
| - investors prefer short-term liquid securities but will be willing to invest in long-term securities if compensated with a premium for lower liquidity |
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Term
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Definition
| - investors choose securities with maturities that satisfy their forecasted cash needs |
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