Calculating interest rates on a yearly basis, Macroeconomics

Assignment Help:

Calculating interest rates on a yearly basis

If the maturity is different from one year, the interest rate is usually recalculated to a corresponding one year rate. For example, consider a bond which matures in six months, has a nominal amount of 25,000 and a current price of 24,200 (no coupons). The six month interest rate is then 800/24,200 = 3.3%. If we want to express this rate as a yearly rate we imagine that we make this investment twice. Our return would then be 1.033.1.033 = 1.067 or 6.7%. Note that if the interest rate is fairly low, then the yearly interest rate is approximately two times the six month interest rate. In the same way, the monthly interest rate is approximately one twelfth of the yearly interest rate.

Keep in mind that the six month interest rate, recalculated to a yearly rate, will typically not be equal to the one year interest rate. For example, suppose that we expect interest rates to increase. In such a case, the yearly interest rate would be an average of the current six month rate and the six month rate six months from now, which is expected to be higher. Hence, the one year rate would be higher than the current six month rate. In the same way, if we expect interest rates to fall, then shorter interest rates will be higher than longer interest rates.

 


Related Discussions:- Calculating interest rates on a yearly basis

Demand for money, what is the meaning of the statement ''money is not merel...

what is the meaning of the statement ''money is not merely a veil or wrapper''?

Real GDP using chained-dollar method, 2012 Mangoes 91 boxes $7 a box ...

2012 Mangoes 91 boxes $7 a box Pinapples 56 boxes $12 a box 2013 Mangoes 108 boxes $14 a box Pinapples 70 boxes $8 a box Real GDP in 2013 using the chained-dol

Describe the corresponding equilibrium strategies, Only two identical firms...

Only two identical firms i = A;B, each with marginal cost MCi = 40 and no fixed cost, operate in a market with demand: Q     p 1    160 2    120 3     90 4     70

Cost to heat our homes and businesses, Use the laws of supply and demand to...

Use the laws of supply and demand to explain why the cost to heat our homes and businesses goes up in the winter time. Be sure to explain your answer fully. At least two paragraphs

Purposes economists disagree and using models of economics, Explain the pur...

Explain the purposes economists disagree and using models of economics. Using Models of Economics: a. Positive economics b. Normative economics A forecast is an easy p

Balance of payment, what causes a shift in the balance of payment?

what causes a shift in the balance of payment?

Explaining balance of payments, Explaining balance of payments: First,...

Explaining balance of payments: First, with the second oil shock of  1979-80 and  doubling of  India's  import bill along with  dismal  export performance as result of severe

Survivor Island, the central economic problem facing the group of survivors...

the central economic problem facing the group of survivors

Trade and development, TRADE AND DEVELOPMENT: In the earlier Units of ...

TRADE AND DEVELOPMENT: In the earlier Units of this block, you have learnt about the trade policy from historical perspective and the recent shift in policy during nineties. Y

Meaning of convex indifference curves, Explain what convex indifference cur...

Explain what convex indifference curves means in terms of marginal utility. What properties must a utility function have in order to obtain convex indifference curves?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd