interest rates are among the most closely watched variables in the economy their mov 638214

Interest rates are among the most closely watched variables in the economy. Their movements are reported almost daily by the news media because they directly affect our everyday lives and have important consequences for the health of the economy. They affect personal decisions such as whether to consume or save, whether to buy a house, and whether to purchase bonds or put funds into a savings account. Interest rates also affect the economic decisions of businesses and households, such as whether to use their funds to invest in new equipment for factories or to save their money in a bank. Before we can go on with the study of financial markets, we must understand exactly what the phrase interest rates means. In this chapter, we see that a concept known as the yield to maturity is the most accurate measure of interest rates; the yield to maturity is what financial economists mean when they use the term interest rate. We discuss how the yield to maturity is measured on credit market instruments and how it is used to value these instruments. We also see that a bond”s interest rate does not necessarily indicate how good an investment the bond is because what it earns (its rate of return) does not necessarily equal its interest rate. Finally, we explore the distinction between real interest rates, which are adjusted for changes in the price level, and nominal interest rates, which are not. Although learning definitions is not always the most exciting of pursuits, it is important to read carefully and understand the concepts presented in this chapter. Not only are they continually used throughout the remainder of this text, but a firm grasp of these terms will give you a clearer understanding of the role that interest rates play in your life as well as in the general economy.