Interest Rates - Overview

What influences short term interest rates?

Influenced by FED (federal reserve bank) and current economic conditions.

What influences long term interest rates?

Set by the bond market based on their expectations about future inflation

What is interest?

The cost of borrowing money

When the economy is weak, what happens to demand for capital and what effect does it have on interest rates?

Less demand for capital and lower interest rates

When the economy is strong, what happens to demand for capital and what effect does it have on interest rates?

More demand and increased interest rates

How are interest rates expressed in this class?

Annual terms

What is spread?

The difference between 2 interest rates; changes over time

What is basis point (BP)

A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument, equal to 1/100th of a percentage point.