Tài chính doanh nghiệp - Chapter 4: The level of interest rates

Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson UniversityAndLanny R. Martindale, Texas A&M University 1Copyright© 2006 John Wiley & Sons, Inc.CHAPTER 4THE LEVEL OF INTEREST RATES2Copyright© 2005 John Wiley & Sons, IncWhat are Interest Rates?Rental price for money.Penalty to borrowers for consuming before earning.Reward to savers for postponing consumption.Expressed in terms of annual rates.As with any price, interest rates serve to allocate resources.3Copyright© 2006 John Wiley & Sons, Inc.The Real Rate of InterestProducers seek financing for real assets. Expected ROI is upper limit on interest rate producers can pay for financing.Savers require compensation for deferring consumption. Time value of consumption is lower limit on interest rate at which savers will provide financing.Real rate occurs at equilibrium between desired real investment and desired saving.4Copyright© 2006 John Wiley & Sons, Inc.Loanable Funds TheorySupply of loanable funds—All sources of funds available to invest in financial claimsDemand for loanable funds— All uses of funds raised from issuing financial claimsEquilibrium interest rate5Copyright© 2006 John Wiley & Sons, Inc.Supply of loanable funds—All sources of funds available to invest in financial claims: Consumer savings Business savings Government budget surpluses Central Bank Action6Copyright© 2006 John Wiley & Sons, Inc.Demand for Loanable FundsAll uses of funds raised from issuing financial claims: Consumer credit purchases Business investment Government budget deficits7Copyright© 2006 John Wiley & Sons, Inc.Equilibrium Interest RateIf competitive forces operate in financial sector, laws of supply and demand will bring rates into equilibrium.Equilibrium is temporary or dynamic: Any force that shifts supply or demand will tend to change interest rates.8Copyright© 2006 John Wiley & Sons, Inc.Price Expectations and Interest RatesUnanticipated inflation benefits borrowers at expense of lenders.Lenders charge added interest to offset anticipated decreases in purchasing power.Expected inflation is embodied in nominal interest rates: The Fisher Effect.9Copyright© 2006 John Wiley & Sons, Inc.Expectations ex ante v. Experience ex post Realized rates of return reflect impact of inflation on past investments. As inflation increases, expected inflation premiums, Pe, may lag actual rates of inflation, Pa, yielding low or even negative actual returns.10Copyright© 2006 John Wiley & Sons, Inc.11Copyright© 2006 John Wiley & Sons, Inc.12Copyright© 2006 John Wiley & Sons, Inc.Interest Rate Movements and InflationHistorically, interest rates tend to change with changes in the rate of inflation, substantiating the Fisher equation.Short-term rates are more responsive to changes in inflation than long-term rates.13Copyright© 2006 John Wiley & Sons, Inc.