1) the price that lenders recieve and borrowers pay gor debt capital 2) Cost of debt
The investment opportunities in productive (cash-generating) assets.
Time Preference for Consumption
the preferences of consumers for current consumption as opposed to saving for future consumption.
In a financial market context, the chance that an investment will provide a low or negative return.
the amount by which prices increase over time .
Real Risk- Free Rate of Interest (r*)
the rate of interest that would exist on default-free U.S. Treasury securities if no inflation were expected.
Nominal (Quoted)Risk- Free Rate (r[RF])
thee rate of interest on a security that is fee of all risk ; proxied by the T-bill rate or the T-bond rate. R[RF] includes an inflation premium.
A premium equal to expected inflation that investors add to the real risk-free rate of return.
Default Risk Premium
The difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketability.
Liquidity Premium (LP)
A premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice and at close its "fair market value".
Interest Rate Risk
the risk of capital losses to which investors are exposed because of changing interest rates.
Maturity Risk Premium
A premium that reflects interest rate risk.
Term Structure of Interest Rates
the relationship between bond yields and maturities.
A graph showing the relationship between bond yields and maturities
Normal Yield Curve
A yield Curve where interest rates on medium term maturities are higher than rates on both sort and long term maturities
Pure Expectations Theory
A theory that states that the shape of the yield curve depends on investors expectations about future interest rates.
Foreign Trade Deficit
the situation that exists when a country imports more than it exports.
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.