INTRODUCTION In contrast to the asset price world‚ there is no commonly accepted model for the movement of the underlying in the interest rate world. Consequently‚ there are a number of different approaches to the pricing of fixed-income products. The simplest approach is to price a product of the term structure of interest rates which also known as yield curve. This method is effective for simple contracts‚ for instance bonds. Hiriyappa
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Markets and Systems Set - 2 Theory and Structure of Interest rates P C Narayan IIMB PCN BFMS L02 1 Loanable Funds theory “Market interest Rate is determined by the factors that control the supply and demand for loanable funds” IIMB PCN BFMS L02 2 1 Demand for Loanable Funds • Household demand for loanable funds – As household income rises‚ so does installment debt – Inverse relationship between demand for lonable funds and interest rate • Business demand for loanable funds – Inverse relationship
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________________ HELPFUL FORMULAS ‚ ‚ ‚ ‚ 1 ‚ 1 ‚ ‚ 1 1 ‚ ‚ ‚ ‚ 1 1 ‚ 1 1 1 1 1 1 1 2 ‚ 1. Given an interest rate of 7.3 percent per year‚ what is the value at date t = 7 of a perpetual stream of $2‚100 annual payments that begins at date t = 15? 2100 0.073 1 1.073 17‚567.03 2. You’ve just joined the investment banking firm of Dewey‚ Cheatum‚ Howe. They’ve offered you two different salary arrangements. You can have $90‚000 per year for
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EXCHANGE RATE SENSITIVITY AND STOCK PRICE : ESTIMATING ECONOMIC EXPOSURE OF TURKISH COMPANIES INTRODUCTION Variability in exchange rate is a major source of macroeconomic uncertainity affecting firms. After the 1970 ’s‚ the rapid expansion in international trade and adoption of floating exchange rate regimes by many countries led to increase exchange rate volatility. The firm ’s exposure to exchange rate risk increased. In the literature three types of exposure under floating exchange rate regimes
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Capital Structure Capital Structure‚ Interest Rates and Credit Ratings Prepared by Ece SARAÇOĞLU BILGI‚ MSc in International Finance INF 503 - Financial Economics and Interest Rates December 2012 TABLE OF CONTENTS I. II. III. a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) IV. V. Why Capital Structure Matters To Investments How Debt and Equity Financing Differ Choosing Between Debt and Equity Financing Process Ownership rights Rights over profit Ease of doing business Repayment Cost to company
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INTEREST RATES ON DOMESTIC DEPOSITS* DEPOSITS – LESS THAN 5 CRORES SR.NO. W.E.F. 01/11/2013** PERIOD INTEREST RATES (% P.A.) INTEREST RATE ON DEPOSITS BELOW RS. 15 LAKHS INTEREST RATES ON DEPOSITS OF RS. 15 LAKHS < RS..50 LAKHS INTEREST RATES ON DEPOSITS OF RS. 50 LAKHS < RS.1 CRORES INTEREST RATES ON DEPOSITS OF RS. 1 CRORE < RS.3 CRORES INTEREST RATES ON DEPOSITS OF RS. 3 CRORES < RS.5 CRORES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12
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HOW INTEREST RATES AFFECT OUR PURCHASING DECISIONS Fluctuating interest rates have a decidedly large impact on purchasing decisions. Higher interest rates mean that consumers don’t have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending‚ banks makes fewer loans. Lower interest rates make it easier for farmers and manufacturers to borrow to invest in equipment and buildings. That gives business more incentive to invest
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Integrated Case 6-21 Morton Handley & Company Interest Rate Determination Maria Juarez is a professional tennis player‚ and your firm manages her money. She has asked you to give her information about what determines the level of various interest rates. Your boss has prepared some questions for you to consider. A. What are the four most fundamental factors that affect the cost of money‚ or the general level of interest rates‚ in the economy? Answer: [Show S6-1 and S6-2 here.] The four most
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monetary shocks considered are shocks to the interest rate reaction function equal to 1% compared to the steady-state value for one year. The temporary scal policy shocks correspond to an increase in spending or a decline in revenue for the government of 1% of the baseline GDP‚ for two years. A permanent shock‚ instead‚ consists on a permanent increase in government spending equal to 1% of the steady-state GDP. Benchmark Case: Response to Interest Rate Shocks The authors
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Insurance Company has just negotiated a three-year plain vanilla swap in which it will exchange fixed payments of 8 percent for floating payments of LIBOR + 1 percent. The notional principal is $50 million. LIBOR is expected to 7 percent‚ 9 percent‚ and 10 percent‚ respectively‚ at the end of each of the next three years. a. Determine the net dollar amount to be received (or paid) by Cleveland each year. ANSWER: End of Year: END OF YEAR 1 2 3 LIBOR 7 9 10 Floating Rate Received 8
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