Interest Rates

These flashcards cover key vocabulary related to interest rates, their determinants, and the effects on financial management.

Interest Rate

The cost of borrowing money or the return for lending money, expressed as a percentage.

Nominal Rate

The quoted interest rate that includes expected inflation.

Real Risk-Free Rate (r*)

The return on an investment with no inflation, reflecting the time value of money.

Inflation Premium (IP)

The portion of the nominal interest rate that compensates for expected inflation.

Default Risk Premium (DRP)

The additional return required by investors to compensate for the risk of default.

Liquidity Premium (LP)

The additional return investors demand for an investment that cannot be quickly converted into cash.

Maturity Risk Premium (MRP)

The extra return required by investors for holding longer-term securities due to increased risk.

Yield Curve

A graph that shows the relationship between interest rates and different maturities of debt securities.

Term Structure of Interest Rates

The relationship between the interest rates of bonds of different maturities.

Pure Expectations Theory

The theory that the shape of the yield curve reflects investor expectations of future interest rates.

Yield Spread

The difference in yields between two different types of securities, such as corporate bonds and Treasury securities.

Production Opportunities

The potential for businesses to invest in profitable projects, affecting the demand for funds.

Time Preferences for Consumption

The degree to which people prefer to spend money now rather than saving for the future.

Expected Inflation

The anticipated rate of inflation over a specified period, which lenders factor into interest rates.

Cost of Money

The cost associated with borrowing or the return from lending money, represented by the interest rate.

Macroeconomic Factors

Wider economic forces that influence interest rate levels, such as government policy and global economic events.