market interest rate

(noun)

the interest rate determined through various investment systems, such as the stock market or the bond market

Related Terms

  • market rate
  • contract rate

Examples of market interest rate in the following topics:

  • Drivers of Market Interest Rates

    • A market interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
    • In a free market there will be a positive interest rate.
    • If the inflationary expectation goes up, then so does the market interest rate and vice versa.
    • Different investments effectively compete for funds, boosting the market interest rate up.
    • The greater the risk is, the higher the market interest rate will get.
  • Chapter Questions

    • If a consul pays $100 of interest every year and the market interest rate equals 6%, compute the market value of this consul.
    • A bond has a face value of $2,000, an interest rate of 10%,and pays interest twice a year.
    • A bond has a face value of $2,000, an interest rate of 10% and pays interest twice a year.
    • If a corporation expects to pay $1 dividend every year that grows 3% per year while the market interest rate is 4%, compute the market value of this stock.
    • Calculate the market price of this stock if the interest rate is 10%.
  • Price Risk

    • Price risk is the risk that the market price of a bond will fall, usually due to a rise in the market interest rate.
    • Interest rates and bond prices carry an inverse relationship.
    • Fixed-rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest rates rise.
    • When the market interest rate rises, the market price of bonds will fall, reflecting investors' ability to get a higher interest rate on their money elsewhere — perhaps by purchasing a newly-issued bond that already features the new higher interest rate.
    • Unless you plan to buy or sell them in the open market, changing interest rates do not affect the interest payments to the bondholder, so long-term investors who want a specific amount at the maturity date do not need to worry about price swings in their bonds and do not suffer from interest rate risk.
  • Chapter Questions

    • Calculate the real interest rate if the nominal interest rate equals 90% while the inflation rate is 100%.
    • You will prove the Fisher Equation and the impact of expected inflation on the market interest rate and the bond's price.
    • Draw a loanable funds market with an equilibrium interest rate of 7%.
    • Draw a loanable funds market with an equilibrium interest rate of 7%.
    • What would happen if the world's interest rate is 5%?
  • Information Costs and Bond Prices

    • Information costs influence the bond prices and interest rates.
    • We include these costs in the bond's market price and interest rate, and they raise the cost of borrowing.
    • Both markets start with the same level of information, and consequently, the bond prices and interest rates are identical.
    • The equilibrium bond prices are identical for both markets and equal P* and the interest rates would be equal.
    • Thus, investors are attracted to the low-information cost bonds, boosting their demand for low information cost bonds, increasing the market price and decreasing market interest rate.
  • The Equilibrium Interest Rate

    • The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).
    • Interest rates fluctuate over time in the short-run and long-run .
    • In the case of money supply, the market equilibrium exists where the interest rate and the money supply are balanced.
    • Interest rates fluctuate based on certain economic factors.
    • Use the concept of market equilibrium to explain changes in the interest rate and money supply
  • Bond Prices in an Open Economy

    • Thus, we deduct a country's inflation rate from the nominal interest rate, yielding the real interest rate.
    • Consequently, the real interest rate equals 5% in Figure 10 while the amount of funds in the market is L*.
    • If the world's real interest rate were 9%, then the domestic investors would invest their funds in the international market, earning a higher interest rate in Figure 10.
    • If this country were a closed economy, subsequently, the market would have a surplus, and market forces would lower the real interest rate to 5%.
    • If this country were closed, then the loanable funds market would cause a shortage, and market forces would increase the real interest rate.
  • Macroeconomic Factors Influencing the Interest Rate

    • Taylor explained the rule of determining interest rates using three variables: inflation rate, GDP growth, and the real interest rate.
    • An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
    • The interest rates are influenced by macroeconomic factors.
    • In other words, (πt - π*t)is inflation expectations that influence interest rates.
    • If the inflationary expectation goes up, then so does the market interest rate and vice versa.
  • The Interest Rate Risk

    • Interest rates became volatile during the 1980s, forcing banks to become more concerned with interest-rate risk.
    • If the interest-rate sensitive liabilities exceed the interest-rate sensitive assets, then rising interest rates cause banks' profits to plummet, while falling interest rates cause banks' profits to increase.
    • If the interest-rate sensitive liabilities equal the interest-rate sensitive assets, then fluctuating interest rates do not affect bank profits.
    • Second, financial innovation created new, liquid financial instruments, such as repurchase agreements, federal funds market, and securitization.
    • Finally, the derivatives market expanded during the 1980s.
  • Interest Rates and Economic Rationale

    • The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money borrowed from a lender (creditor).
    • Interest rates also influence inflationary expectations.
    • For example, low interest rates can lead to large amounts of investments poured into the real-estate market and stock market.
    • The interest rate also directly impacts money and inflation because the government can affect the markets and alter the total of loans, bonds, and shares that are issued.
    • The interest rates reached 14% in 1969 and lowered to 2% by 2003.
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