Brown Modern Interior Trifold Brochure.pdf

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1. JAN CARL T. ABDON
BSTM 2A
I n t e r e s t
R a t e
a n d
Its Role i n Finance
Our prime purpose
in life is to helk
others and if you
can't
helk them, at least
don't hurt them.
Dalai Lama
CHAPTER 10

2. CONCEPT OF
INTEREST RATE
the cost of using money expressed as a
percentage of the
principal for a given period of time, which is
usually per year
• plays an important role in finance as it affects
various economic
factors like demand for money and the velocity
of money
Series
Types of Demand
• Transaction demand - demand for money to
pay for the regular
expenses of living like purchase of goods/
services, pay bills, etc.
Precautionary demand - demand for money for
unforeseen events
like sickness, injury, accidents, etc.
Speculative demand - demand for money with
the intention of
using money when the opportunity to earn
more arises like
purchase of investment securities or business
opportunities.
INTEREST RATE
AND ITS ROLE IN FINANCE
Finance deals with funds which
denote money.
Money lent or money borrowed has
a cost, that is, the interest rate.
Changes in interest rates affect the
level of investment spending, level of
consumer expenditures,
redistribution of wealth between
borrowers and lenders, and prices of
financial securities.
The interest rate on government
securities like T-bills are used as
benchmark yield for all securities
because these securities are default-
free.
INTEREST RATE AND
THE ECONOMY
Roles of Interest Rate in the Economy
• helps guarantee that current savings will flow into
investment to promote economic growth
•rations the available supply of credit, generally providing
loanable funds to those investment projects with the highest
expected returns
•brings into balance the supply of money with the public's
demand for money
•acts as an important tool of government policy through its
influence on the volume of savings and investment
INTEREST RATE THEORIES
Classical Theory
It posits that the rate of interest is
determined by two factors:
supply of savings, mainly from
households, (although businesses and
governments also save); and
demand for investment capital coming
mainly from the business sector
(although, households also invest).
This theory highlights the importance of
households and businesses.
DETERMINANTS OF
INTEREST RATE
1. Inflation Expectations
2. Monetary Policy
3. Business Cycle
4. Government Budget Deficits
5. Savings
6.
Investment Demand
7.
Money Supply
8.
Money Demand