Conceptually. Interest rates Nominal Real Inflation risk-free risk-free isk Interest Interest+ premium Rate Rate IRP Krf k Mathematically. (1+krf)=(1+k)(l+IRP)
Conceptually: Nominal risk-free Interest Rate krf = Real risk-free Interest Rate k* + Inflationrisk premium IRP Mathematically: (1 + krf) = (1 + k*) (1 + IRP) Interest Rates
Conceptually. Interest rates Nominal Real Inflation risk-free risk-free isk Interest Interest+ premium Rate Rate IRP Krf k Mathematically. (1+krf)=(1+k)(1+IRP) This is known as the“ Fisher effect
Conceptually: Nominal risk-free Interest Rate krf = Real risk-free Interest Rate k* + Inflationrisk premium IRP Mathematically: (1 + krf) = (1 + k*) (1 + IRP) This is known as the “Fisher Effect” Interest Rates
Interest rates Suppose the real rate is 3 %, and the nominal rate is 8%. What is the inflation rate premium? (1+krf=(1+kx)(1+IRP) (1.08)=(1.03)(1+IRP) (1+IRP)=(1.0485),S0 IRP=4.850
• Suppose the real rate is 3%, and the nominal rate is 8%. What is the inflation rate premium? (1 + krf) = (1 + k*) (1 + IRP) (1.08) = (1.03) (1 + IRP) (1 + IRP) = (1.0485), so IRP = 4.85% Interest Rates
Term Structure of Interest rates The pattern of rates of return for debt securities that differ only in the length of time to maturity
Term Structure of Interest Rates • The pattern of rates of return for debt securities that differ only in the length of time to maturity
Term Structure of Interest rates The pattern of rates of return for debt securities that differ only in the length of time to maturity. yield to maturity time to maturity(years)
Term Structure of Interest Rates • The pattern of rates of return for debt securities that differ only in the length of time to maturity. yield to maturity time to maturity (years)