Determinants of Interest Rates

Flashcards for key vocabulary and concepts related to the determinants of interest rates in financial mathematics.

Interest

Compensation received for deferring consumption or the cost of consuming when resources are not available.

Supply and Demand Curves

Graphs that represent the relationship between the quantity of money available for lending and the cost of borrowing.

Yield Curve

A collection of interest rate values for different terms, which can be normal, inverted, bowed, or flat.

Real Interest Rate

The quoted interest rate on a loan with inflation protection.

Nominal Interest Rate

The corresponding interest rate for a loan without inflation protection.

Credit Spread

The difference between the interest rate on a loan with default risk and a loan without default risk.

Liquidity Preference Theory

The theory suggesting that lenders prefer to lend money for shorter terms unless the interest rate compensates them for longer terms.

Default Risk

The likelihood that a borrower will not fully repay a loan.

Compensation for Default Risk

The additional interest rate charged on loans with default risk compared to those without.

Central Bank

An institution that serves as a bank to the commercial banks and regulates a country's currency and economy.