Determinants of Interest Rates

1. What is the interest rate that is observed in financial markets? Give example.
2. What are the uses of nominal interest rates?
3. What happens to the price of debt security when interest rates rise and vice versa?
4. Compute for the price of a $100 two-year bond if the prevailing interest rate is: (a) 8%, (b) 10%,
(c) 12%
5. What theory views equilibrium of interest rates in financial markets as a result of supply and
demand for loanable funds?
6. Where does supply and loanable funds may come from?
7. Which refers to funds provided to the financial markets by net suppliers of funds?
8. What happens to supply for loanable funds when interest rate increases?
9. What will be the shape of supply curve?
10. What are the general factors that affect supply of loanable funds?
11. Who is the supplier in which the loanable funds come from their excess cash collections after
deducting its required expenditures?
12. Who is the supplier in which the loanable funds come from their excess income after deducting
current consumption needs?
13. Who is the supplier in which the loanable funds come from their excess working capital while it
is still not yet used for current operations?
14. Who is the supplier that uses their available funds to explore other global markets?
15. Which refers to funds required from the financial markets by net users of funds?
16. What happens to the demand for loanable funds when interest rates rise?
17. What happens to the demand curve then?
18. Who uses funds to finance current and past budget deficits?
19. Who uses funds for purchases of capital assets (e.g. land, buildings, machineries) and for
working capital management?
20. Who uses funds to find cheaper sources of dollar funds, especially if their local currency is weak?
21. Who uses funds for purchases of homes, durable and nondurable goods?
22. How does the supply and demand graph look like? Label it.
23. What are the factors of supply of funds and its impact on supplies of funds and equilibrium
interest rates?
24. What is the difference between direct and inverse impacts?
25. Which refers to the action taken by a nation’s central bank to control money supply to achieve
macroeconomic goals that promote sustainable economic growth?
26. What are the 2 types of monetary policy?
27. What aims to inject more money in the economy and drive interest rates at a low level?
28. What aims to restrict the flow of money in the economy, and drive interest rates at a higher
level?
29. What are the factors of demand of funds and its impact on supplies of funds and equilibrium
interest rates?
30. What is the formula for yield rate or market rate?
31. What is the interest rate that would exist on a risk-free security (e.g. Treasury securities) if no
inflation were expected over the term of a security? What does this rate reflects?
32. What refers to the increase in the standardized basket of goods and services over a given period
of time?
33. What is the formula of inflation premium?
34. What is usually computed as the sum of the real risk-free rate (r*) and the inflation premium
(IP)? What is its formula?
35. What is fisher effect?
36. What is the formula of fisher effect?
37. What is the relationship between interest rates and inflation?
38. What is the risk that a security issuer will fail to make its promised interest and principal
payments to the buyer of the security?
39. What are not subject to default risk?
40. What difference represents the default risk premium?
41. What is the ability of a financial security to be converted to cash easily and at its fair market
value?
42. Which securities are always liquid?
43. Which is more liquid between publicly-traded and not publicly traded?
44. Why do we add liquidity premium to the nominal rate of the individual security?
45. What happens in Premiums on Special Provisions or Covenants?
46. Which securities are expected to be more susceptible to price risk due to fluctuations in interest
rates?
47. Why do we add maturity risk premium on the interest rate of the security?
48. What do you call the so-called term structure of interest rates?
49. What is the most frequently reported and analyzed yield curve?
50. What yield curve describes MRP is higher for long-term securities than for short-term securities;
hence, MRP is positive? What type of yield curve is this?
51. What yield curve best describes MRP is higher in short-term securities than for long-term
securities; hence, MRP is negative? What type of yield curve is this? When do we normally
encounter this?
52. What yield curve best describe MRP is zero? What happens to their yield rates?
53. What are the three theories do the shape of yield curve predominantly falls?
54. Which theory describes the yield curve reflects the market’s current expectations of future
short-term rate? What happens during equilibrium and disequilibrium? How does the shape of
yield curve look like under this theory?
55. What are geometric averages of current and expected future, E(Nr1), short term interest rates?
56. What is Liquidity Premium Theory?
57. What is Market Segmentation Theory?
Factors of supply (TRIP)

Shifters of Supplies (MINTER)

Shifters of DEMAND (URE)