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FIN 501 (31)
Chapter 10

CFIN501- Chapter 10- Interest Rates.docx

7 Pages
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Department
Finance
Course Code
FIN 501
Professor
Edward Blinder

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CFIN501 Chapter 10 Interest RatesInterest Rate History And Money Market RatesInterest rate historyLooking back at history of return on various types of investments gave us a useful perspective on rates of returnoSimilar insights are available from interest rate historyFigure 101 bills are short term and bonds are long termCentral bank is more concerned with controlling inflationLong term rates around 37many market observers have commented that these inflation rate levels are extraordinarily lowWhy interest rates have been at such low levels over the last few years selling risky assets and moving into safer onesFlight to quality increases the demand for treasury securities short term billsMoney Market RatesPrime ratebasic interest rates on short term loans that the largest commercial banks change to their most creditworthy corporate customersBellwether rateinterest rate that serves as a leader or as a leading indicator of future trendsoInterest rates as a bellwether of inflationBank of Canadas bank rate is a pivotal interest rate for commercial banksoDiscount rate is the interest rate that the bank offers to commercial banks for overnight reserve loansoBanks are required to maintain revers equal to some fraction of their deposit liabilitiesoWhen banks cannot supply sufficient reserves from internal sources must borrow reserves from other banks through the bank of CanadaBank of Canada central bank of CanadaoCharged with the responsibility of managing interest rates and the money supply to control inflation and promote stable economic growthoBank rateinterest rate that the bank of Canada offers to commercial banks for overnight reserve loansAnnounced charge in the discount rate is often interpreted as a signal of the bank of Canadas intentions regarding future monetary policy oIncreasing the discountsignaling that it intends to pursue a tight money policyControl budding inflationary pressuresoDecreasing the discount ratesignaling an intent to pursue a loose money policy to stimulate economy activityMany times a bank rate changecatching up to financial market conditions rather than leading themCall money rateinterest rate brokerage firms pay for call money loans which are bank loans to brokerage firmsoRate used as the basis for customer rates on margin loansoBasic rate that brokers use to set interest rates on customer call money loansoCharge their customers the call money rate plus a premiumbroker may negotiate the premiumCommercial papershortterm unsecured debt issued by the largest corporations oDominated by financial corporationsbanks and insurance companies or financial subsidiaries of large corporationsoPopular investment vehicle for portfolio managers and corporate treasurers with excess funds on hand that they wish to invest on a short term basisoEuro commercial paper commercial paper denominated in euros rater than dollarsCertificate of deposit CDlarge denomination deposits of 100000 or more at commercial banks for a specified termoInterest rates paidvaries according to the term of the depositoNegotiable instrumentscan be bought and sold among investorsoNegotiable certificates of deposits of negotiable CDsCan be bought or sold through a brokeroLarger denomination CDs described here should not be confused with the smalldenomination CDs that bank offers to retails customersoSmall denominations CDsbank time deposits1
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