Professional Documents
Culture Documents
Interest Rates
And Bond
Valuation
Cost of Money
Money can be obtained from debts or equity
both of which has a cost
Cost of debt = interest
Cost of equity = dividends
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Figure 6.1
SupplyDemand Relationship
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Figure 6.2
Impact of Inflation
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Terms structure of interest rates describes the relationship between longterm and short-term interest rates through a yield curve.
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Figure 6.3
Treasury Yield Curves
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Monetary Policy
Central banks like Bangladesh Bank and
Federal Reserves control money supply in the
economy.
Too much supply will reduce the short-term
interest rates and increase the long-term
rates.
Too little supply will have the opposite effect
Fiscal Policy
Government makes federal budgets annually,
which is the basis of the countrys fiscal policy.
A deficit in the budget means government have
to borrow funds to cover it up and this
increases the demand for funds and thus the
interest rates.
Sometimes government forces the central bank
to print in more money thus increasing the
supply and reducing the short-term rates.
International Factors
Foreign Trade Deficit is a situation that exists when a country imports
more than it exports.
Whenever there is deficit, it means borrowing becomes necessary and this
effects the interest rates.
Business Activity
Business activities include investments in new
ventures or expansion
When there is a collective increase in business
activities in a country, then demand for funds
increases which also increase the short-term interest
rates.
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