Interest Rates
the relationship between inflation and interest rates
there is typically an inverse relationship, high interest rates equals low inflation, low interest rates = high inflation.
default risk
The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions.
maturity risk
A maturity risk premium is essentially the extra amount you can expect to earn on an investment by tying up your money in it for a longer period of time. For instance, the additional revenue you could get from a 10-year bond versus a 1-year bond would have a certain level of maturity risk premium.
the relationship between interest rates and the demand for money
A) As interest rates decrease, demand for money increases. B) As interest rates increase, demand for money increases. C) Interest rates are determined by demand for money. D) Interest rates and demand for money are unrelated.
interest rate
An 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).
liquidity risk
In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Types of liquidity risk[edit] Market liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of market risk.
the impact of interest rate fluctuations on an economy
Interest rates are one of the major drivers of our economy, setting the pace for investment markets.
interest-rate fluctuation
The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).
nominal interest rate
The nominal interest rate is the rate quoted in loan and deposit agreements. The equation that links nominal and real interest rates is: (1 + nominal rate) = (1 + real interest rate) (1 + inflation rate). It can be approximated as nominal rate = real interest rate + inflation rate.
real interest rate
The real interest rate is the growth rate of purchasing power derived from an investment. By adjusting the nominal interest rate to compensate for inflation, you are keeping the purchasing power of a given level of capital constant over time.
causes of interest-rate fluctuations
key changes and increase in rates to contain inflationary forces and to stabilise the economy. The RBI contains inflation and liquidity by toggling parameters like cash reserve ratio (CRR), repo rate and reverse repo rates. The CRR is a tool used by the RBI to control the money supply and interest rates.
