The meaning of Interest Rates - Determinants of Interest rates
3 important questions on The meaning of Interest Rates - Determinants of Interest rates
What is the Nominal Interest Rate?
The rates quoted by financial institutions and used for discounting or compounding cash flows
On December 31, 2015, the average one-year
Treasury Constant Maturity rate was about
0.65% and the 2015 annual inflation rate was
about 0.70%. What was the real interest rate?
(0.65% − 0.70%) ÷ (1.0070) = -0.05%
Consider an investment that requires an initialinvestment of $10 million and generates a cash
flow of $3 million per year for four years. If the
interest rate is 5%, the investment has an PV of
$0.638 million
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