ECON 435: Inflation and interest rates

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ECON 435 > ECON 435: Inflation and interest rates

Interest rate risk

• Depends on time to maturity
• Size of coupon

Calculating rate of return

• R = the nominal return
• r = the real return
• h = the inflation rate

According to the fisher effect: 1 + R = (1 +r) x (1 + h)

Since 1 + R = 1 + r + h + r x h and r x h approx. 0 r appoximates R - h (all this is on a slide)

The term strucutre of interest rates

• the relationship between time-to-maturity and the nominal yield of default-free, zero-coupon bonds.
• See slide for details
  • Note, interest rate premium is always increasing over time
    • buy a longer life bond, the interest rate will be higher
    • Inflation premium is increasing over time in boom, decreasing over time in a recession (see graph)

Lecture slides

• Get lecture slides [here]