Podcast
Questions and Answers
What happens to the market value of an asset or liability when interest rates increase?
What happens to the market value of an asset or liability when interest rates increase?
What is the relationship between interest rate risk and market price risk?
What is the relationship between interest rate risk and market price risk?
What is the risk that earnings from a financial asset need to be reinvested in lower-yielding assets?
What is the risk that earnings from a financial asset need to be reinvested in lower-yielding assets?
What is the uncertainty about the interest rate at which a company could reinvest funds borrowed for a longer period?
What is the uncertainty about the interest rate at which a company could reinvest funds borrowed for a longer period?
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What is the risk that the cost of rolling over or reborrowing funds could be more than the return earned on asset investments?
What is the risk that the cost of rolling over or reborrowing funds could be more than the return earned on asset investments?
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What should a financial intermediary aim to earn when reinvesting borrowed funds at an interest rate of 10%?
What should a financial intermediary aim to earn when reinvesting borrowed funds at an interest rate of 10%?
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What happens when the return on investment is lower than the interest on borrowed funds?
What happens when the return on investment is lower than the interest on borrowed funds?
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What is the risk that a borrower might not be able to pay back a loan?
What is the risk that a borrower might not be able to pay back a loan?
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Why do suppliers investigate the background of buyers?
Why do suppliers investigate the background of buyers?
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What is the result of inflation on the purchasing power of money?
What is the result of inflation on the purchasing power of money?
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What is the consequence of rising gas prices?
What is the consequence of rising gas prices?
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What is the risk associated with the increase in prices of goods and services?
What is the risk associated with the increase in prices of goods and services?
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What happens to the equilibrium value of interest rates when one of the factors changes, causing a shift in the demand or supply curve?
What happens to the equilibrium value of interest rates when one of the factors changes, causing a shift in the demand or supply curve?
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What is the framework for deciding which factors cause the demand curve for bonds to shift?
What is the framework for deciding which factors cause the demand curve for bonds to shift?
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What is the effect of an increase in wealth on the demand curve for bonds?
What is the effect of an increase in wealth on the demand curve for bonds?
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What is the relationship between the economy's growth and the demand for bonds?
What is the relationship between the economy's growth and the demand for bonds?
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What is the effect of a change in expected returns on bonds relative to alternative assets on the demand curve for bonds?
What is the effect of a change in expected returns on bonds relative to alternative assets on the demand curve for bonds?
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What is the purpose of Table 4.2 in understanding the demand curve for bonds?
What is the purpose of Table 4.2 in understanding the demand curve for bonds?
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What happens to the expected return on bonds when there is an increase in expected inflation?
What happens to the expected return on bonds when there is an increase in expected inflation?
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What is the effect of an increase in expected inflation on the demand for bonds?
What is the effect of an increase in expected inflation on the demand for bonds?
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What happens to the demand for bonds when there is an increase in the riskiness of bonds?
What happens to the demand for bonds when there is an increase in the riskiness of bonds?
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What is the effect of an increase in the volatility of prices in the stock market on the demand for bonds?
What is the effect of an increase in the volatility of prices in the stock market on the demand for bonds?
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What is the effect of a rise in expected inflation on the real interest rate on bonds?
What is the effect of a rise in expected inflation on the real interest rate on bonds?
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What happens to the demand curve for bonds when there is an increase in the expected rate of inflation?
What happens to the demand curve for bonds when there is an increase in the expected rate of inflation?
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What happens to the demand for bonds when their liquidity increases?
What happens to the demand for bonds when their liquidity increases?
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What is the effect of increased liquidity of alternative assets on the demand for bonds?
What is the effect of increased liquidity of alternative assets on the demand for bonds?
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What was the result of the reduction of brokerage commissions for trading common stocks in 1975?
What was the result of the reduction of brokerage commissions for trading common stocks in 1975?
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What is one of the factors that can cause the supply curve for bonds to shift?
What is one of the factors that can cause the supply curve for bonds to shift?
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What happens to a firm's willingness to borrow when it expects to make more profitable investments?
What happens to a firm's willingness to borrow when it expects to make more profitable investments?
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What is the purpose of Table 4.3?
What is the purpose of Table 4.3?
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Study Notes
Interest Rate Risk and Market Price Risk
- When interest rates increase, the market value of assets and liabilities decreases
- When interest rates fall, the market value of assets and liabilities increases
- Securities decline in price when interest rates rise, and interest rate risk and market price risk go in opposite directions
Reinvestment Risk/Refinancing Risk
- Reinvestment risk arises when earnings from a financial asset need to be reinvested in lower-yielding assets or investments due to fallen interest rates
- Refinancing risk is the risk that the cost of rolling over or reborrowing funds could be more than the return earned on asset investments
Default/Credit Risk
- Default risk or credit risk is the risk that the borrower will be unable to pay interest on a loan or principal of a loan
- Credit investigators investigate the background of borrowers before companies or banks grant loans requested by borrowers
Inflation/Purchasing Power Risk
- Inflation risk or purchasing power risk is the risk of an increase in the value of goods and services, reducing the purchasing power of the currency
- When prices or inflation rise, purchasing power decreases
Shifts in the Demand for Bonds
- The demand curve for bonds shifts in response to changes in four parameters:
- Wealth
- Expected returns on bonds relative to alternative assets
- Risk of bonds relative to alternative assets
- Liquidity of bonds relative to alternative assets
Shifts in the Supply of Bonds
- The supply curve for bonds shifts in response to changes in three factors:
- Expected profitability of investment opportunities
- Expected inflation
- Government budget
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Description
Learn about the inverse relationship between interest rates and market values of assets and liabilities, and how changes in interest rates affect market prices.
