Interest Rates by rt3463df

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									Interest Rates

   By: Matt Webb
What are Interest Rates?
 Compensation   for use of other peoples
  capital
 Essentially, the cost of money
 All rates relate back to bank rates
Bank Rates
                Who sets Them?
                    In Canada the Bank
                     of Canada
                    In the US the FOMC
                     of the Federal
                     Reserve
Historical US rates
Determinants of Interest Rates
 Inflation
 Foreign     developments and exchange
  rate
 Demand and supply of capital
 Default risk
 Central bank operations
 Credibility of central bank
        Taken from CSC textbook
Users of Credit
 Home   buyers – mortgages
 Car Owners – purchase financing &
  leases
 Consumers – credit cards
 Businesses – working capital loans
 Corporations – bonds & debentures
 Governments – to finance debt
How They Affect Bonds?
 Inverse   relationship
   When    interest rates go up, bond prices go
    down
   When interest rates go down, bond prices
    go up
 Relatesto opportunity costs, on the
 present value of money
Present Value
 Simple   present value
   PV = FV divided by (1 + r) ^ n
   Where PV = present value

   FV = future value

   R = discounting rate

   N = number of compounding periods
How they Affect Stocks?
 Higher interest rates have two primary
 effects on equities
   They  make bonds less appealing to offer
   While also making bonds more appealing
    to buy
The P/E – interest rate
relationship
 P/E  ratios should be roughly the inverse
  of interest rates
 Eg, if interest rates are 5% then P/E
  should be 20
   (100   div 5 ) = 20
 Thisratio was not followed whatsoever
 during tech boom

								
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