CHAPTER 4: THE BEHAVIOR OF INTEREST RATE

1. Theories; Classical Model and Keynesian Model

1.1. Classical Model; Loanable Funds theory/ Framework

1.1.1. Factors that shift the demand curve

1.1.1.1. Wealth

1.1.1.2. Expected return

1.1.1.3. Riskiness of bond

1.1.1.4. Liquidity of bond

1.1.1.5. Information cost of bond

1.1.2. Factor that shift the supply of bonds

1.1.2.1. Expected probility

1.1.2.2. Expected inflation

1.1.2.3. Goverment budget

1.1.2.4. Business taxation

1.2. Keynesian Model; Liquidity Preference theory

1.2.1. Factor that shift the demand curve

1.2.1.1. Income effect

1.2.1.2. Price level effect

1.2.2. Factor that shift the supply of bonds

1.2.2.1. Money supply

2. Interest rates and return

2.1. Yield to maturity (YTM); also call internal of return (IRR)

2.1.1. Simple Loan

2.1.1.1. repaid to the lender at the maturity date along with an additional payment

2.1.2. Fixed Payment Loan

2.1.2.1. repaid by making the same payment every period for a set numbrt of years

2.1.3. Coupon Bond

2.1.3.1. pays the owner of the bond a fixed interest payment every year until the maturity date

2.1.4. Discount Bond

2.1.4.1. does not make any interest payment,it just pays off the face value

2.2. Interest rates; return on capital

2.3. Rate of return; time period is measured by return

3. Real and nominal interest rates

3.1. Nominal interest rate; unadjusted for inflation

3.2. Real interest rate; the nominal interest rate adjusted for inflation