Interest Rates and bond valuation - Interest rates and required returns

7 important questions on Interest Rates and bond valuation - Interest rates and required returns

What is a liquidity preference?

a general tendency for investors to prefer short-term securities.

What are the three factors that can affect the interest rates?

1. inflation

2. risk

3. liquidity preference

What is the real rate of interest?

the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where suppliers and demanders of funds have no liquidity preferences and there is no risk.
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What is the nominal rate of return?

The actual rate of interest charged by the supplier of funds and paid by the demander.

What is term structure of interest rates?

The relationship between the maturity and rate of return for bonds with similar levels of risk.

What is a normal yield curve?

an upward-sloping yield curve indicates that long-term interest rates are generally higher than short-term interest rates.

What is a flat yield curve?

A yield curve that indicates that interest rates do not vary much at different maturities.

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