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To understand why the interest rate spread is a leading indicator, one must interpret the interest rate as the price of money. A high interest rate means that obtaining money is costly. If interest rate spreads are great, this means investors are anticipating an increase in the price of money. The price of money will increase due to an increase in the quantity of money demanded (and an increase in demand). Investors see the economy recovering, and in the process of this recovery, they see an increase in demand for money (loans etc.) to buy new capital and purchase other nondurables. Therefore the price of money increases and thus the spread increases.
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What does the nominal interest rate mean?
A nominal interest rate is an interest rate that does not factor in the rate on inflation. Nominal interest rate could also refer to an interest rate that does not adjust for the full effect of compounding.
What is the relationship between interest rate exchange rate and inflation?
interest rate can be seen as the price of a currency, if it goes up, then the value of investment would rise as well, thus making this currency more desirable comparing to others, leading to an appreciation. in terms of inflation, interest rate is also the price at which investor pay for their loans, so if the interest rate is low, let's say 0, then investors can get their loans at no cost, then loads of loans will be made, leading to more investment, more investment means better company revenue in theory, so higher income, higher price level
How does the real interest rate relate to the nominal interest rate?
A real interest rate and a nominal interest rate are quite similar. The only real difference between the two interest rates are that a nominal interest rate include the cost of inflation where as the real interest rate does not.
What does effective interest rate mean?
An effective annual interest rate considers compounding. When the principle is compounded multiple times each year the interest rate increased to be more than the stated interest rate. The increased interest rate is the effective annual interest rate.
What is nominal interest rate minus the expected rate of inflation?
The expected real interest rate.
What is the work of libor?
Libor or LIBOR is the London Interbank Offered Rate. The way it works is that it is the average interest rate based on estimates by leading banks in London.
How does corporate bond ratings work?
The leading rating agencies give a rating when a bond is first issued, and that rating determines how high the interest rate on that bond is. A higher rating means the bond will have a lower interest rate.
What is nominal interest?
Nominal InterestA nominal interest rate is the interest rate that does not compensate for inflation. This is used in relation to "effective interest rate" or "real interest rate."" Real Interest Rate = Nominal Interest Rate - Inflation Rate " Improvement suggested by Palash Bagchi.
Is it better to pay off a credit card with a low interest rate first or a second card with a higher interest rate?
Of the two - you're better off paying the higher-rate card first. If you spread the cost of the higher-rate card over a loinger period - you'll pay more interest, than if you pay the same instalments to the lower-rate card.
What does the nominal interest rate mean?
A nominal interest rate is an interest rate that does not factor in the rate on inflation. Nominal interest rate could also refer to an interest rate that does not adjust for the full effect of compounding.
What is the relationship between interest rate exchange rate and inflation?
interest rate can be seen as the price of a currency, if it goes up, then the value of investment would rise as well, thus making this currency more desirable comparing to others, leading to an appreciation. in terms of inflation, interest rate is also the price at which investor pay for their loans, so if the interest rate is low, let's say 0, then investors can get their loans at no cost, then loads of loans will be made, leading to more investment, more investment means better company revenue in theory, so higher income, higher price level
How does the real interest rate relate to the nominal interest rate?
A real interest rate and a nominal interest rate are quite similar. The only real difference between the two interest rates are that a nominal interest rate include the cost of inflation where as the real interest rate does not.
What is the formula to calculate monthly interest rate if the annual interest rate is known?
Annual Interest Rate divided by 12= Monthly Interest Rate
What does nominal interest rates means?
A nominal interest rate is an interest rate that does not factor in the rate on inflation. Nominal interest rate could also refer to an interest rate that does not adjust for the full effect of compounding.
How do you convert annual interest rate to monthly?
Let i = annual rate of interest. Then i' = ((1+i )^(1/12))-1 Where i' = monthly rate of interest
What is the Formula for simple interest rate?
The answer for rate in simple interest is =rate= simple interest\principle*time
What is the name of a loan whose rate is NOT guaranteed to stay the same?
Adjustable rate loans may have varying interest rates throughout the life of the loan. Most adjustable rate loans have an interest rate based on a widely-known public index (e.g., the prime rate or LIBOR) adjusted (plus or minus) some fixed spread.
