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Interest Rate
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Interest Rate
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Interest Rate
What is the interest rate? Explain the loanable funds theory of interest rates.
The basic price that equals to the demand for, and supply of loanable funds in the financial
markets is the interest rate. Borrowed assets include consumer goods, cash, and large assets.
Large assets include property such as a building or a car. Interest is basically the charge or rental
fee for the user of said asset. A “lease rate” refers to the interest rate of large assets such as a
building or car.
The loanable funds are related directly to the interest rates and total amount of the funds
that are in circulation throughout the financial market periodically. Furthermore, interest rates
will fall if the supply of funds increase or the holding demand remains constant.
What are the two basic sources of loanable funds?
The primary source of loanable funds is current savings in a depository institution.
Savings are supplied from all sectors of the economy. Furthermore, the majority of savings slow
through U.S. financial institutions. Savings can be accumulated by individual effort or through
contractual savings programs. Contractual savings programs include purchasing whole life or
endowment insurance policies and/or repaying installment or mortgage loans.
Another basic source of loanable funds is the Expansion of deposits by depository
institutions. This source of loanable funds are created by the banking system.
Banks and other depository institutions create deposits which become the most vastly
used form of money in the U.S. economy and it channel savings to borrowers. Net additions to
the money supply are a source of loanable funds. Loanable funds drop below the level of current
savings when the money supply contracts.
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What are some of the major factors affecting the supply of loanable funds?
There is multiple factors that affect the supply of loanable funds. Factors have the nature
of increasing as the interest rates rise. The consequence of the effects is minimal when compared
to other factors that influence the volume of savings and the opportunity for the banking system
to expand deposits.
What are the determinants of market interest rates?
Market interest rates are determined by several factors. Primarily, the interest rate(s) that
we view in the marketplace are called nominal interest rates because there is a premium included
for potential peaks in the inflation rate. Nominal interest rate is also not free from the risk of
default so the borrower is subject to a default risk premium. When there is no inflation expected
we experience the real rate of interest. The real rate of interest is the interest rate on a risk-free
financial debt instrument.
Describe the three types of U.S. Treasury securities. How do interest rates affect your personal
finances?
Treasury bills bear the most limited maturities of Federal obligations. Treasury bills are
normally issued for 90 days, and have the possibility to extend to 182 days. Treasury bills in
particular are issued at auction every four weeks when matured. Issues of Treasury bills are
offered weekly by the Treasury to reimburse part of the total volume of maturing bills.
Essentially, 90 day Treasury bills mature and are extended in 13 weeks. Every week there is a
1/13th portion of the bill that is refunded.
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Treasury notes are normally issued at particular interest rates when matured for over a
year but never more than ten years. These intermediate-term federal obligations are mostly held
by commercial banks
Treasury bonds can be issued with any maturity but normally contain a maturity in excess
of five years. Treasury bonds present interest at said rates. Most complications of these bonds are
paid off or callable by the government throughout several years before their maturity. Treasury
bonds can not mature for longer than 30 years. Buying and selling of Treasury bonds by dealers
in maintain the active market in the government.
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References
Investopedia. (2010). Interest Rate. Retrieved August 4, 2010 from
http://www.investopedia.com/terms/i/interestrate.asp
Melicher, R.W. & Norton, E.A. (2005). Introduction to institutions, investments, and
management. (12th ed.). Hoboken, NJ: Wiley.