About This Chapter
Interest Rates, Rate Changes, & Risk Structure - Chapter Summary
If you need help understanding the basics of interest rates, rate changes and risk structure, you've reached the right place! This chapter is filled with bite-sized lessons you can study any time to gain greater insight into interest rate risk, the term structure of interest rates, how to solve interest rate problems and more. Study these lessons at the pace that works for you, and take accompanying quizzes to find out how well you grasp key concepts. Use our chapter exam to ensure you have a complete understanding of every lesson. Once you've finished this chapter, you will be ready to:
- Define and list types of interest rates
- Outline the history of the federal funds rate
- Explain how banks are able to borrow funds from the federal government
- Share how the Federal Reserve impacts interest rates and changes the money supply
- Differentiate between and define real and nominal interest rates
- Exhibit knowledge of money demand and interest rates
- List different types of investments and interest rates
- Explain differences between short and long-term interest rates
1. What is Interest Rate? - Definition, Types & History
Everything costs money, even money. In this lesson, you'll learn about interest rates - specifically, what they are, how they are determined, and what they mean for an individual and an economy.
2. Federal Funds Rate: Definition & History
The Federal Funds Rate is one of a few important rates that banks use. In this lesson, you'll learn what the federal funds rate is and what it means to you.
3. The Discount Rate & Monetary Policy: How Banks Can Borrow Money from the Federal Reserve
Learn more about the discount rate, which is the rate that banks pay to the central bank when borrowing money. This lesson explains how changes in the discount rate affect the money supply and how the central bank can use the discount rate as part of monetary policy.
4. How the Federal Reserve Changes the Money Supply and Affects Interest Rates
Discover the connection between the money supply and economic output and how the central bank's tools lead to an increase or decrease in real GDP via expansionary and contractionary monetary policy.
5. Real vs. Nominal Interest Rates and Changes in Prices
This lesson explains the important difference between nominal and real interest rates and provides examples of how to use the Fisher equation to adjust nominal rates for inflation.
6. Money Demand and Interest Rates: Economics of Demand
Learn about the differences between money, wealth and income and explore the factors that determine the demand for money in an economy. Take a look at the demand curve for money as well.
7. Interest Rate Risk: Definition, Formula & Models
Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.
8. Types of Interest Rates & Investments
Ever wonder how to make any sense out of all those investment options you constantly hear about? This lesson helps provide some understanding, as well as introduces the concept of the real interest rate.
9. Term Structure of Interest Rates: Definition & Overview
In this lesson, you will learn the definition of the term structure of interest rates and its related concepts. The behavior of this fundamental benchmark of interest rate is followed by all the economic agents in the setting of the macro economy.
10. Short vs. Long Term Interest Rates: Differences & Significance
After reading this lesson, you will understand why long-term interest rates are usually higher than short-term interest rates. You will also see some examples of why this makes sense.
11. How to Solve Interest Problems: Steps & Examples
If you want to know how your money can earn money, then it's essential to learn about solving interest problems. In this lesson, we'll practice calculating interest amounts and interest rates.
12. Nominal Interest Rate: Definition & Equation
Understanding interest rates is a vital part of personal and business financial management. In this lesson, you'll learn about the nominal interest rate and how to calculate it from different perspectives. A short quiz follows the lesson.
13. Real Interest Rate: Definition & Calculation
An investment that pays 10% interest doesn't guarantee that you'll have a 10% increase in purchasing power. In this lesson, you'll learn about the real interest rate and how to calculate it.
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Other chapters within the Finance 303: Financial Institutions & Markets course
- Foundations of Finance & Investment
- The Federal Reserve System & Financial Institutions
- Understanding Financial Markets
- Basics of Financial Investments
- Equity Ownership & Risk Exposure
- Calculating Prices & Yields
- Principles of Financial Statement Analysis
- Financial Risk Management & Mitigation
- Financial Regulation & Ethics