interest rates

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Interest Rates

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Interest Rates. Relationship Between Different Interest Rates. Most interest rates of similar duration tend to be highly correlated Short-term and long-term interest rates are loosely related Most interest rates are determined directly or indirectly by the bond market. - PowerPoint PPT Presentation

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Interest Rates

Interest Rates

Relationship Between Different Interest RatesMost interest rates of similar duration tend to be highly correlatedShort-term and long-term interest rates are loosely relatedMost interest rates are determined directly or indirectly by the bond market

Interest Rates and Expected InflationExpected inflation: interest rates compensate for expectations of future inflationReal Interest Rate: interest rate adjusted for inflationTIPS: provide market-based estimates of the real interest ratesDifference between traditional Treasury and TIPS provides an estimate of expected inflation

Interest Rates and RiskRisk premium (credit spread): difference between interest rate and interest rate on a comparable Treasury bondMarket-based measure of perceived risk of owning a particular bondRises somewhat during recessions as weaker companies face a higher chance of defaultingExtreme levels are evidence of a financial crisis