Describe market interest rates, Macroeconomics

Q. Describe Market interest rates?

The most significant interest rates from a macroeconomic perspective are interest rates that government pays on the loans they use to finance the national debt. Government borrows money by issuing government bonds. All such bonds have a fixed nominal amount and a given maturity date. Government promises to pay exactly the nominal amount (also known as the principal or the face amount) to the holder at the maturity date. Some bonds also promise regular payments, so-called coupon payments, at regular intervals, coupon dates.

In most nations you will find several types of government bonds. A significant distinction is the duration of the bond, which is, difference between the maturity date and the date when bond was issued. For instance, in US, government bonds maturing in one year or less are known as Treasury bills.

Characteristically bonds with a maturity of a year or shorter have no coupons. In its place, they are sold below nominal amount at what is known as issue price. Issue price for a bond without coupons should be below the nominal amount. For illustration, if you pay 23,500 for a bond with a nominal amount of 25,000 maturing in one year then your interest rate is (25 000 - 23 500)/23 500 = 6.38%. 

In most nations, you also find government bonds with longer maturity. For illustration in the U.S. you have Treasury notes (two to ten years) and Treasury bonds (10 years or longer).

Government bonds with longer maturity normally make coupon payments. You will also find other types of bonds.

Posted Date: 8/13/2013 3:04:02 AM | Location : United States

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