Chapter 9 Interest Rates

A collection of vocabulary flashcards based on the key concepts from Chapter 9 on Interest Rates.

Prime Rate

The basic interest rate on short-term loans that the largest commercial banks charge to their most creditworthy corporate customers.

Federal Funds Rate

The interest rate that banks charge each other for overnight loans of $1 million or more.

Discount Rate

The interest rate that the Federal Reserve offers to commercial banks for overnight reserve loans.

Banker’s Acceptance

A postdated check on which a bank has guaranteed payment, commonly used to finance international trade transactions.

Call Money Rate

The interest rate brokerage firms pay for call money loans from banks.

London Interbank Offered Rate (LIBOR)

Interest rate that international banks charge one another for overnight Eurodollar loans, being replaced by the Secured Overnight Financing Rate (SOFR) in the US.

Eurodollars

U.S. dollar denominated deposits in banks outside the United States.

Treasury STRIPS

Pure discount instruments created by stripping the coupons and principal payments of U.S. Treasury notes and bonds into separate parts.

Nominal Interest Rate

Interest rates as they are observed and quoted, without adjustment for inflation.

Real Interest Rate

Interest rates adjusted for inflation effects; calculated as nominal interest rate minus inflation rate.

The Fisher Hypothesis

The assertion that the general level of nominal interest rates follows the general level of inflation.

Expectations Theory

The theory that the term structure of interest rates reflects financial market beliefs about future interest rates.

Market Segmentation Theory

The theory that debt markets are segmented by maturity, with interest rates determined separately in each segment.

Maturity Preference Theory

The theory that long-term interest rates contain a maturity premium necessary to induce lenders into making longer term loans.