FIN 302 Lecture Notes - Lecture 6: Fisher Equation, Yield Curve, Interest Rate

• School: University of Miami
• Department: Finance Business Administration
• Course: FIN 302
• Professor: Peterson

Document Summary

Interest: the fee for borrowing money expressed as a percentage of a loan, real rate of interest. Interest rate that would exist in the absence of inflation (deflation: nominal rate of interest. Interest rates tend to rise and fall with changes in the rate of inflation: rates tend to rise when the growth rate of the economy increases and tend to fall when the growth rate of the economy slows. Interest rates tend to follow the business cycle. Shape of the yield curve: 3 factors that influence the shape of the yield curve, real rate of interest, expected rate of inflation. If higher inflation is forecast, the yield curve will slope upward because longer-term yields will contain a larger inflation premium than shorter-term yields. If investors believe inflation will subside, the yield curve may slope downward. In an economic expansion, the real rate of interest and the inflation premium increase monotonically.