EC233 Lecture Notes - Lecture 4: Fisher Equation, Opportunity Cost, Ceteris Paribus
Document Summary
Maturity and volatility of bond returns interest rate risk. Prices and returns for long-term bonds are more volatile than those for shorter-term bonds. There is no interest rate risk for any bond whose time to maturity matches the holding period. Nominal actual reported interest rate (without adjustment for inflation) Real adjusted for changes in price level so it more accurately reflects the cost of borrowing. Money and banking: behaviour of interest rates. Wealth total resources owned by the individual, including all assets. Expected return return expected over the next period on one asset. Risk degree of uncertainty associated with the return on one asset in relation to that on alternative assets. Liquidity degree to which an asset can be readily converted into money balances. At lower bond prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher: an inverse relationship: quantity supplied of bonds is lower: positive relationship.