FIN 701 Study Guide - Financial Market, Theory-Theory, Reinvestment Risk
7 Oct 2013
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As long as competitive forces allowed to operate freely in financial system, equilibrium interest rate for that security is i* The bank of canada and interest rate risk. Bank of canada sets target range for inflation (1%-3%) and then adjusts target for overnight rate rate that fis charge each other for one-day funds to achieve inflation target (range midpoint, 2%) Bottom of band is rate bank of canada will pay for deposits; top of band is rate charged by bank of. If forecasts inflation below target rate, lowers target overnight rate so money is cheaper; if forecasts inflation above target rate, raises target overnight rate so money is expensive. Federal funds rate rate charged by u. s. federal reserve on overnight loans to fis. Federal reserve actions targeted at short-term rates but usually feeds through to whole structure of interest rate.
