Interest Rates and Inflation Overview

This set of flashcards covers key concepts related to interest rates, inflation, bond markets, and economic theories, based on the provided lecture notes.

Fisher Equation

i = r + πᵉ, where i is the nominal interest rate, r is the real interest rate, and πᵉ is expected inflation.

Opportunity Cost of Holding Money

The interest rate represents potential earnings lost by holding cash instead of investing.

Rule of 70

A method to estimate the number of years required to double an investment, calculated as 70 divided by the interest rate.

Inverted Yield Curve

A situation where short-term interest rates are higher than long-term rates, signaling potential recession expectations.

Efficient Markets Hypothesis (EMH)

A theory stating that market prices reflect all available information, making it difficult for fund managers to consistently outperform the market.

Quantity Theory of Inflation

Inflation rate is determined by the difference between money supply growth and output growth, mainly valid in the long run.

Ex Ante vs Ex Post Real Rates

Ex ante is based on expected inflation, while ex post is based on actual inflation; unexpected inflation affects real rates differently for lenders and borrowers.

Impact of Retirees on Bond Markets

Increased demand for safe assets leads to higher bond prices and lower yields.

Bond Pricing Dynamics

When bond price is greater than face value, yield is less than coupon rate; when bond price is less than face value, yield is greater than coupon rate.

Treasury Buyback Program

A government program where the government buys bonds, resulting in a decrease in supply, which raises bond prices and lowers yields.