Interest rates are determined by the interaction of supply and demand in the market for loanable funds. The supply comes from domestic savings, foreign lending, and money creation by banks. The demand comes from consumers, businesses, and governments seeking credit, as well as foreign borrowers. Equilibrium is reached where the supply and demand for loanable funds are equal. Factors such as expected inflation, default risk, liquidity risk, and monetary policy influence the supply and demand curves and thus impact interest rate levels.
For Videos use the links below
0 Course Introduction:: https://www.youtube.com/watch?v=9km4aXTus5c
1 Financial system and Environment : https://www.youtube.com/watch?v=BC2bAftm43c
2 Participants in a Financial System: https://www.youtube.com/watch?v=IEv_y7_aR7o
3 Functions of a Financial System: https://www.youtube.com/watch?v=T73-Dd8RM4I
4 Financial System and its components: https://www.youtube.com/watch?v=ovkAjEO8YAw
5 Efficiency of a financial system: https://www.youtube.com/watch?v=8xEUtvKYvPc
Meaning of Term Structure of Interest Rates
Significance of Term Structure of Interest Rates
What is Yield Curve?
A spot rate and a forward Rate
Theories of Term Structure of Interest Rates
Financial Markets - Money market-Organized and Unorganized-Sub markets
Capital market- Primary market-IPO-FPO- NFO, Book Building-Right Issue-Private placement- Bonus issue-Buyback
Secondary Market-Stock exchanges- Role and functions of Stock Exchanges- BSE-NSE.
Regulatory authorities and their functions – RBI, SEBI
For Videos use the links below
0 Course Introduction:: https://www.youtube.com/watch?v=9km4aXTus5c
1 Financial system and Environment : https://www.youtube.com/watch?v=BC2bAftm43c
2 Participants in a Financial System: https://www.youtube.com/watch?v=IEv_y7_aR7o
3 Functions of a Financial System: https://www.youtube.com/watch?v=T73-Dd8RM4I
4 Financial System and its components: https://www.youtube.com/watch?v=ovkAjEO8YAw
5 Efficiency of a financial system: https://www.youtube.com/watch?v=8xEUtvKYvPc
Meaning of Term Structure of Interest Rates
Significance of Term Structure of Interest Rates
What is Yield Curve?
A spot rate and a forward Rate
Theories of Term Structure of Interest Rates
Financial Markets - Money market-Organized and Unorganized-Sub markets
Capital market- Primary market-IPO-FPO- NFO, Book Building-Right Issue-Private placement- Bonus issue-Buyback
Secondary Market-Stock exchanges- Role and functions of Stock Exchanges- BSE-NSE.
Regulatory authorities and their functions – RBI, SEBI
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Important terms used in economics. It is useful for people who are new to economics. These terms are helpful for ones who are studying in commerce stream.
Capital Market presentation from UMBC reporting. The struucture of rates and return. and others
Capital Market presentation from UMBC reporting. The struucture of rates and return. and others
Capital Market presentation from UMBC reporting. The struucture of rates and return. and others
Capital Market presentation from UMBC reporting. The struucture of rates and return. and others. It will p[ublich and increase as youy pick category and add more atgs
NO1 Uk Rohani Baba In Karachi Bangali Baba Karachi Online Amil Baba WorldWide...Amil baba
Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
#vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore#blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #blackmagicforlove #blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #Amilbabainuk #amilbabainspain #amilbabaindubai #Amilbabainnorway #amilbabainkrachi #amilbabainlahore #amilbabaingujranwalan #amilbabainislamabad
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
3. Interest Rate
• The acts of saving and lending, and borrowing
and investing, are significantly influenced by and
tied together by the interest rate.
• The interest rate is the price a borrower must pay
to secure scarce loanable funds from a lender for
an agreed-upon time period.
• Interest rates, in general, reflect the cost of funds-
the interest rate can be viewed as the rental price
for money (opportunity cost for money).
4. • effect of policy rate to the market interest
rates depends on the structure of interest
rates and the level of financial development
• All business organizations or individuals are
responsive to interest rate of banks and
financial institutions in one-way or another.
Interest rate structure is the relationship
between maturity and yield in order to
determine bow the bond portfolio behaves in
matching the maturity structure
5. Interest rate structure depends upon
a) the behavior of the yield curve
b) composition of the maturity structure
c) sensitivity of the change in the interest rate
and
d) default risk included in matching the level of
interest rate and its relationship with the
yield curve.
7. Pre Interest Rate Phase (pre-1955):
Prior to 1955, the domestic financial system was
underdeveloped - it was dominated by
unorganized/informal financial system generally
driven by private individuals, merchants and
landlords
• To provide financial services, Nepal Bank Limited was
established in 1937, and reflects the start of the
formal financial system.
• Therefore, in the initial period, the primary
responsibility for Nepal Rastra Bank was to bring the
monetary system under its control - this was reflected
in the preamble of the Nepal Rastra Bank Act of
1955.
8. Controlled Interest Rate Phase (1956 - 1983)
• The establishment of Nepal Rastra Bank
(NRB) in 1956 coincided with the period of
planning
• In this year, NRB also adopted a controlled
interest rate determination regime, where the
Bank used to fix deposit and lending rates of
the commercial banks.
9. Transitional Interest Rate Phase (1984 - 1989):
• In early 1980s, Nepal experienced a series of
BOP problem. To control the depletion of
international reserve Nepal adopted the
International Monetary Fund's (IMF)
• In this regard, on November 16, 1984 NRB
initiated a limited flexibility to commercial
banks to fix the interest rates.
• Commercial banks were then allowed to offer
interest rate on savings and time deposits to the
extent of 1.5 and 1.0 percentage point above
the minimum level.
10. Liberalized Interest Rate Phase (1990 -
present): Controlled interest rate
• Regime was completely abolished on August
31, 1989.
• Banks and financial institutions were now
given full autonomy to determine their interest
rates on deposits and lending.
12. The Classical Theory of Interest Rates
• The classical theory argues that the rate of
interest is determined by two forces:
the supply of savings, derived mainly from
households, and
the demand for investment capital, coming mainly
from the business sector.
13. Household Savings
• Current household savings equal the
difference between current income and
current consumption expenditures.
• Individuals prefer current over future
consumption, and the payment of interest is a
reward for waiting.
• Higher interest rates encourage the
substitution of current saving for current
consumption.
14. Business and Government Savings
• Most businesses hold savings balances in the
form of retained earnings, the amount of
which is determined principally by business
profits, and to a lesser extent, by interest
rates.
• Income flows in the economy and the pacing
of government spending programs are the
dominant factors affecting government
savings (budget surplus).
15. The Classical Theory of Interest Rates
The Equilibrium Rate of Interest
In the Classical Theory of Interest Rates
Interest
Rate
Savings &
Investment
rE
QE
Investment Savings
17. The Loanable Funds Theory of Interest
• The popular loanable funds theory argues that
the risk-free interest rate is determined by the
interplay of two forces:
the demand for credit (loanable funds) by
domestic businesses, consumers, and
governments, as well as foreign borrowers
the supply of loanable funds from domestic
savings, dishoarding of money balances, money
creation by the banking system, as well as foreign
lending.
18. The Loanable Funds Theory of Interest
The Demand for Loanable Funds
• Consumer (household) demand is relatively
inelastic with respect to the rate of interest.
• Domestic business demand increases as the rate
of interest falls.
• Government demand does not depend
significantly upon the level of interest rates.
• Foreign demand is sensitive to the spread
between domestic and foreign interest rates.
19. The Loanable Funds Theory of Interest
Total Demand for Loanable Funds (Credit)
Interest
Rate
Amount of
Loanable Funds
Total Demand = Dconsumer +
Dbusiness +
Dgovernment +
Dforeign
20. The Loanable Funds Theory of Interest
The Supply of Loanable Funds
• Domestic Savings. The net effect of income,
substitution, and wealth effects is a relatively
interest-inelastic supply of savings curve.
• Dishoarding of Money Balances. When
individuals and businesses dispose of their
excess cash holdings, the supply of loanable
funds available to others is increased.
21. The Loanable Funds Theory of Interest
• Creation of Credit by the Domestic Banking
System. Commercial banks and nonbank thrift
institutions offering payments accounts can
create credit by lending and investing their
excess reserves.
• Foreign lending is sensitive to the spread
between domestic and foreign interest rates.
22. The Loanable Funds Theory of Interest
Total Supply of Loanable Funds (Credit)
Interest
Rate
Amount of
Loanable Funds
Total Supply
= domestic savings +
newly created money +
foreign lending –
hoarding demand
23. The Loanable Funds Theory of Interest
The Equilibrium Interest Rate
Interest
Rate
Amount of
Loanable Funds
rE
QE
Demand
Supply
24. The Loanable Funds Theory of Interest
• At equilibrium:
Planned savings = planned investment across the
whole economic system
Money supply = money demand
Supply of loanable funds = demand for loanable
funds
Net foreign demand for loanable funds = net
exports
25. The Loanable Funds Theory of Interest
• Interest rates will be stable only when the
economy, money market, loanable funds
market, and foreign currency markets are
simultaneously in equilibrium.
27. Term Structure of Interest Rates
• The term structure of interest rates is the
relationship between the yield to maturity and
the time to maturity for pure discount bonds.
• The term structure of interest rates is of
fundamental importance in macroeconomics
because monetary policy affects short-term
interest rates, but investment depends on
long-term interest rates.
28. • The term structure of interest rates, also called
the yield curve, is a graph that plots the yields of
similar-quality bonds against their maturities,
from shortest to longest.
• The term structure of interest rates shows the
various yields that are currently being offered on
bonds of different maturities. It enables investors
to quickly compare the yields offered on short-
term, medium-term and long-term bonds.
29. Term Structure Facts
to Be Explained
Besides explaining the shape of the yield curve, a
good theory must explain why:
1. Interest rates for different maturities
move together.
2. Yield curves tend to have steep upward slope
when short rates are low and downward
slope when short rates are high.
3. Yield curve is typically upward sloping.
31. TERM STRUCTURE THEORIES
Pure Expectations Theory
• Key Assumption: Bonds of different maturities are
perfect substitutes
• Implication: Bonds of different maturities
are equal
• Investment strategies for two-period horizon
1. Buy $1 of one-year bond and when matures buy another
one-year bond
2. Buy $1 of two-year bond and hold it
32. • Explains why yield curve has different slopes
1. When short rates are expected to rise in future, average
of future short rates = int is above today's short rate;
therefore yield curve is upward sloping.
2. When short rates expected to stay same in future,
average of future short rates same as today’s, and yield
curve is flat.
3. Only when short rates expected to fall will yield curve be
downward sloping.
33. Liquidity Preference Theory
• Key Assumption: Bonds of different maturities
are substitutes, but are not perfect substitutes
• Implication: Modifies Pure Expectations
Theory with features of Market Segmentation
Theory
• Investors prefer short-term rather than long-
term bonds. This implies that investors must
be paid positive liquidity premium, lnt, to hold
long term bonds.
34. IF LT bond yields have a liquidity premium,
then usually LT yields > ST yields
or yield curve slopes up.
35. The Liquidity Preference (Cash Balances) Theory
of Interest Rates
The Equilibrium Interest Rate
In the Liquidity Preference Theory
Interest
Rate
Quantity of
Money / Cash
Balances
rE Total
Demand
QE
Money
Supply
36. Limitations
• The liquidity preference theory is a short-term
approach. In the longer term, the assumption
that income remains stable does not hold.
• Only the supply and demand for money is
considered. A more comprehensive view that
considers the supply and demand for credit by
all actors in the financial system - businesses,
households, and governments - is needed.
37. Market Segmentation Theory
• Key Assumption: Bonds of different maturities
are not substitutes at all
• Implication: Markets are completely
segmented; interest rate at each maturity are
determined separately
• if assumption is true,
– separate markets for ST and LT bonds
– slope of yield curves tells us nothing about future ST
rates
• unrealistic to assume NO substitution bet. ST and
LT bonds
39. Interest rate risk
• Interest rate risk is that which exists in an
interest-bearing asset, such as a loan or a bond,
due to the possibility of a change in the asset's
value resulting from the variability of interest
rates.
• Interest rate risk is the effect on prices and
interim cash flows caused by changes in the level
of interest rates during the life of the financial
asset.
40. Continue….
• The movement of interest rates affects a financial
institutions reported earnings by changing:
Net interest income
The market value of trading accounts
Other interest sensitive income and expenses,
such as mortgage servicing fees.
• It is risk that an investment's value will change
due to a change in the absolute level of interest
rates.
41. Type of Interest Rate Risk
Re pricing Risk
• It is maturity mismatch risk because the
greater the maturity of any investment,
greater the change in price for a given change
in the interest rates.
• The re pricing risk is analyzed by the gap,
duration & scenario techniques.
42. Continue…
Yield curve risk
• Yield curve risk is the result of price changes
induced by the changing slope of the yield
curve.
• Such risk usually arises when a liability is
matched with a combination of assets that
has the same duration but different in cash
flows.
43. Continue….
Basis risk
• It arises from imperfect correlation in the
adjustment of the rates earned and paid on
different instruments with otherwise similar re-
pricing characteristics.
• When interest rates change, these differences can
give rise to unexpected changes in the cash flows
and earnings spread between assets and
liabilities of similar maturities.
44. Continue…
Option Risk
• Option risk arises due to the change in assets
and liabilities durations when change occurs in
interest rates.
• It also arise from the prepayment, cap, floor
and other options embedded in underlying
mortgages, term deposits & other products.
45. Continue….
Prepayment/Extension Risks:
• The risk that asset repayments accelerate at a
time when interest rates are low, resulting in
diminished interest income and the need to
reinvest repaid funds in lower-yielding assets.
• This risk intensifies when loan customers or
bond issuers exercise their explicit call options
to pay off the bank’s asset prior to maturity
and interest rates decline.
46. Tools and Techniques for Minimizing
Interest Rate Risk
Interest Rate Swaps
• is a contractual agreement between two
parties to exchange interest payments on set
dates in the future.
• A company will typically use interest rate
swaps to limit or manage exposure to
fluctuations in interest rates.
47. Continue….
Interest Rate Caps
• An interest rate cap is a derivative in which the
buyer receives payments at the end of each
period in which the interest rate exceeds the
agreed strike price.
• There are several different types of interest rate
cap structures including an initial, periodic and
lifetime interest rate cap structure.
48. Continue…
Forward Rate Agreement
• FRA is a forward contract between parties that
determines the rate of interest to be paid or
received on an obligation beginning at a
future start date.
• The contract will determine the rates to be
used along with the termination date and
notional value.
49. Financial Future Contract
• It is a futures contract on a short term interest
rate.
• A contractual agreement, generally made on
the trading floor to buy or sell a particular
commodity or financial instrument at a pre-
determined price in the future.
Continue…
50. Interest Rate Collar
• It is an investment strategy that uses
derivatives to hedge an investor's exposure to
interest rate fluctuations.
• This strategy protects the investor by capping
the maximum interest rate paid at the collar's
ceiling, but sacrifices the profitability of
interest rate drops.
Continue…
52. Factors Affecting Interest Rates
1. Expected inflation
2. Default Risk
3. Liquidity Risk
4. Demand and supply of money
5. Income Taxes Factor
6. Production opportunities
7. Time preferences for consumption
53. Expected Inflation
• Continual increase in price of goods/services
• Over time, as the cost of products and services increase,
the value of money decreases.
• As for finance lending sector, borrowers may find it is
attractive to borrow now but less attractive for lender.
The value of money now has fallen as compared to the
time when they lent their money. In order to compensate
this loss, lenders have to increase the interest rate.
• Higher expected inflation, higher interest rates
54. Default Risk
• Default Risk occurs when the issuer of the bond is
unable or unwilling to make interest payments when
promised.
The spread between the interest rates on bonds with
default risk and default-free bonds, called the risk
premium, indicates how much additional interest
people must earn in order to be willing to hold that
risky bond.
A bond with default risk will always have a positive
risk premium, and an increase in its default risk will
raise the risk premium.
Higher (lower) risk, higher (lower) interest rate.
55. Increase in Default Risk
on Corporate Bonds
1. Risk of corp. bonds , Dc ,
Dc shifts
2. Excess Supply Pc , ic
1. Relative risk of T bonds , DT
, DT shifts right
2. Excess Demand PT , iT
56. Liquidity Risk
A liquid asset is one that can be quickly and cheaply
converted into cash. The more liquid an asset is, the
more desirable it is (higher demand), holding
everything else constant.
For e.g. Treasury Bonds are the most liquid of all
long-term bonds.
57. Demand and Supply of money
• Supply and demand is a fundamental concept in market
economy.
• Supply refers to the level of quantity of services or
products can be offered, while demand refers to the
quantity required for the services and products. Demand
and supply of money can affect interest rates.
• For e.g. In US, The Federal Reserve Bank has taken a
step to manipulate money supply through an open market
operation, by purchasing large volumes of government
security to increase money supply, thus reduce the
interest rates or vice versa.
58. Income Taxes Factor
• Interest payments on municipal bonds are exempt
from federal income taxes.
• For the same before tax yield, their expected after
tax returns are higher.
• Treasury bonds are exempt from state and local
income taxes, while interest payments from
corporate bonds are fully taxable.
59. Production Opportunities
• Production opportunities are the investment
opportunities in productive (cash-generating) assets
Time Preferences for Consumption
• Time preferences for consumption are the preferences
of consumers for current consumption as opposed to
saving for future consumption.
• The higher value on current (future) consumption, the
higher (lower) the interest rate
60. Monetary Policy
• Monetary policy is the process by which the monetary
authority of a country controls the supply of money, often
targeting a rate of interest for the purpose of
promoting economic growth and stability.
• Monetary policy decisions involve setting the interest rate on
loans in the money market.
• The official goals of monetary policy usually include relatively
stable rates and low unemployment.
61. Economic Growth
• Rate of interest that is determined in the
market is also affected by economic growth.
• If there is positive economic growth then this
leads to increase in interest rate in the market
and vice versa.
62. Determinants of interest rates
Nominal interest rate in the absence of inflation
r = r* + IP + DRP + LP + MRP
r = required return on a debt security
r* = real risk-free rate of interest
IP = inflation premium (Пe)
DRP = default risk premium (see p. 183)
LP = liquidity premium (illiquidity)
MRP= maturity risk premium (time)
63. Determinants of interest rates
r = Represents any nominal rate
r* = Represents the “real” risk-free rate of
interest. Like a T-bill rate, if there was no
inflation. Typically ranges from 1% to 4%
per year.
rRF = Represents the rate of interest on default
risk-free Treasury securities.
67. Determination of interest rate
Supply of
Loanable funds
Demand of
loanable funds
0 Quantity of loanable funds
Priceofcredit,investment
Rate of interest
Volumeofcredit
68. • Interest rate is regulated by the central bank during the early stage of
financial market development taking the period from 1955 to 1965.
• Country's central bank namely Nepal Rastra Bank gradually began to
liberalize the determination of interest rate on a phase-wise basis
according to compatibility, efficiency and maturity of the banks and the
financial institutions that have developed in the country.
• But for national interest from the monetary stability view point, Nepal
Rastra Bank can get in the way in guiding the banks and financial
institutions to relate interest rate to economic growth.
• Nepal Rastra Bank determines the interest rate on Government
Development Bond and National Saving Certificate
• At present, deregulation of the interest rate as result of economic and
financial liberalization has brought autonomy and determination of the
level of interest rate to the banks and financial institutions guided to
follow the directives of the unified Umbrella Act.
70. Interest rate structure in Nepal
• Interest rate charged differ in government securities, refinances of
loan, commercial bank deposit and loan floated by other financial
institutions in this five year period from 2002 to 2007.
• In T-bills, interest rates decreased from 4.94 percent in 2002 to
3.95 percent in 2004.
• In National savings bond, Interest rate recorded 7.13 percent in
2004 and legal of development bond recorded 3.8 percent in 2004.
• Refinancing rate of NRB varied from 2 percent to 5.5 percent in
2004.
• During same period refinance rate against foreign currency loan
is 2 percent during same period.
71. Cont...
• The deposit rate of these commercial banks varies from 2 periods
to 7.5 period taking savings deposit and various time deposits of
minimum 3 months to 2 years and above in 2004.
• Then lending rates vary from 4 percent to 16 percent for kinds of
loan offered such as industrial loan. agricultural loan, export bills,
commercial loans and overdrafts.
• The interest rates charged by other financial institutions are from
10 percent to 10 percent.
• But in 2005 the Treasury bill rate is 3.94 percent and it decreases to
3.13 percent in 2006.
• At the same time the development bank remains at the constant
rate of 6.5 percent to 13 percent.
72. Cont...
• But the development bond rate varies from 3 percent to 8 percent.
• The refinance rate of the Nepal Rastra Bank decreases to 1.5 percent
to 6 percent in 2006.
• The deposit rate of commercial bank for 3 months to 2 years is 2 to 5
percent in 2006.
• lending rate is 8.25 percent to 13.5 percent in case of industry,
agriculture, commercial loans and overdraft.
• But for other financial institutions the interest rate varies from 10.5
percent to 13.5 percent.
• The percent per annual interest rate has varied from 3.13 to 2.13
percent in T-bills during 2007 and national savings, it has decreased
to 8.15 percent and development bonds provide the maximum
interest rate 6.75 percent.
73. Cont...
• The refinancing rate of NRB has decreased to 3.5 percent
and in case of foreign loans it comes to 3.25 percent.
• In case of commercial banks, interest rate on deposits
increased slightly 5.5 percent although, the pressure of
liquidity has raised interest rate 6 percent and maximum to 7
percent.
• The lending rate of commercial banks has increased to 14.4
percent.
• For other financial institutions the interest rate in 14 percent.
• At present, NRB as well as the investors are finding the
interest rate provided by banks is not compatible to the
market interest rate.
75. • The interest rate influences inflation indirectly via domestic demand for
goods and services and via its effect on the exchange rate.
• When the interest rate falls, it is less profitable for households to save,
and they will therefore increase their consumption.
• Borrowing also becomes less costly.
• The interest rate helps guarantee that current savings will flow into
investment to promote economic growth.
• It rations the available supply of credit, generally providing loanable funds
to those investment projects with the highest return.
• It brings the supply of money into balance with the public’s demand for
money
• The interest rate serves as an important tool for government policy
through its influence on the volume of savings and investment
76. CONCLUSION
• Money supply and Money demand are the crucial factor in determining the
interest rate in the context of Nepal.
• Interest rates, in general, reflect the cost of funds- the interest rate can be
viewed as the rental price for money (opportunity cost for money).
• The movement of interest rates affects a financial institutions reported
earnings and book capital.
• Interest rates will be stable only when the economy, money market, loanable
funds market, and foreign currency markets are simultaneously in equilibrium.
• Finally the various tools and techniques can be used for the minimization of
interest rate risk such as interest rate swaps, interest rate caps n many other.