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History of Interest Rates and Risk Premiums Chapter 5 Factors Influencing Rates Supply Households Demand Businesses Government’s Net Supply and/or Demand Federal Reserve Actions 15­2 Level of Interest Rates Interest Rates Supply r1 0 Demand Q0 Q1 Funds 15­3 Real vs. Nominal Rates Fisher effect: Approximation nominal rate = real rate + inflation premium R = r + i or r = R - i Example r = 3%, i = 6% R = 9% = 3% + 6% or 3% = 9% - 6% Fisher effect: Exact r = (R - i) / (1 + i) 2.83% = (9%-6%) / (1.06) Empirical Relationship: Inflation and interest rates move closely together 15­4 Rates of Return: Single Period HPR P1 P0 D1 P0 HPR = Holding Period Return P0 = Beginning price P1 = Ending price D1 = Dividend during period one 15­5 ... - tailieumienphi.vn