Cost of Money and Interest Rates

These flashcards cover key concepts related to the cost of money, interest rates, and the factors influencing them.

Cost of Money

The price of using borrowed funds, typically expressed through interest rates.

Interest Rate

The percentage charged on borrowed money or earned on invested money, typically expressed as an annual percentage.

Supply of Money

The total amount of money available in an economy at a particular time, influenced by the Federal Reserve.

Demand for Money

The desire to hold liquid assets, determined by factors like production opportunities, time preference for consumption, risk, and inflation.

Risk-Free Rate (rRF)

The return on an investment with no risk of financial loss, typically associated with government bonds.

Risk Premium (RP)

The additional return expected by investors for taking on additional risk.

Yield Curve

A graphical representation showing the relationship between interest rates and the different maturities of debt instruments.

Expectations Theory

A theory suggesting that the shape of the yield curve reflects investor expectations about future interest rates.

Liquidity Preference Theory

The theory that suggests investors prefer liquidity and will pay more for it, resulting in lower returns on more liquid investments.

Market Segmentation Theory

The theory that segments the bond market by maturity, stating different segments have different supply and demand influences.

Inflation Premium (IP)

The portion of an interest rate that compensates investors for expected inflation.

Default Risk Premium (DRP)

The additional yield that investors require to compensate for the risk of default on a borrower.

Liquity Premium (LP)

The additional yield that compensates for the risk associated with the lack of liquidity in a financial asset.

Maturity Risk Premium (MRP)

The additional yield that investors demand for holding longer-term bonds due to increased uncertainty.

Open Market Operations

The activity by the Federal Reserve of buying and selling government securities in order to control the money supply.

Federal Reserve

The central banking system of the United States that oversees the nation's monetary policy.

Business Activity

The level of economic activity in a region, which affects the demand for money and subsequently interest rates.

Forecasting Interest Rates

The process of predicting future interest rates based on various economic indicators.