FIN 010 Lecture Notes - Lecture 5: Risk Premium, Corporate Finance, Investment
Document Summary
An interest rate or capital debt expense is essentially the cost of borrowing money, or the sum that can be received from borrowing money or depositing funds. There are several types of interest rates on the capital markets: government interest rates, commercial (corporate) interest rates, short-term interest rates, long- term interest rates, fixed interest rates and floating interest rates. Government interest rates reflect a national borrowing expense through a state treasury or a central bank. Highly established and financially powerful nations such as the us, uk, Germany, switzerland, japan, canada, and australia borrow money at the lowest possible interest rates because they are considered reasonable credit risks with virtually no possibility of defaulting (not paying) on their bonds. Those we call risk-free interest rates (rf) Policy rates in less creditworthy nations ( many developing market nations) are not deemed risk-free, because there is a greater likelihood in default.
