interest rate and Exchange Rates
Lecture10EXCHANGE RATES AND INTEREST RATES(国际经济学)
Paradox
(CIP) (UIP) 1. 2. i$ - i£ = (F-S)/S = F/S - 1 i$ - i£ = (Se-S)/S = Se/S – 1
A higher domestic interest rate means that domestic currency is expected to depreciate over time. (Se > S or F > S) Holding F (or Se) and i£ fixed, an increase in the domestic interest rate appreciates the domestic currency, making S lower.
10
More Exercises
Q: Use the CIP or UIP to find how the exchange rate (S) will change if a. the domestic interest rate rises. b. the foreign interest rate rises. c. the domestic currency is expected to be weaker in the future.
7
Deviations from CIP
• Transactions costs • Differential taxation • Government controls (Political risk) In the presence of taxation, CIP is modified: (1-t$) i$ = (1-t£)i£ + (F-S)/S
Lecture 10
Chapter 6 Exchange Rates, Interest Rates, and Interest Parity
⑤ convert the £ into $ at s3
④receive principal amount in £
Detailed Explanation
In spot FOREX market,
① borrow 1$ at the cost of i$ X 3/12 ② sell 1$ buy £at S($/ £ ), have 1/ S($/ £ ) in £ ③ Invest 1/ S($/ £ ) in £financial asset, a predicted £return is 1/ S($/ £ ) X (1+ i£ X 3/12) ④ receive principal amount in £ , 1/ S($/ £ ) X (1+ i£ X 3/12), ⑤ convert the £into $, 1/ S($/ £ ) X (1+ i£ X 3/12) X S3 ⑥ repay principal amount in $, 1 X (1+i$ X 3/12)
Presumption for his interest arbitrage:
------------No obstacle for international capital flow; No transaction cost; Size of arbitrage is unlimited; This investor is risk neutral.
3 £ $ 3 £ $ 3 £ $
Uncovered IRP Condition
Rewrite the equation, then get the uncovered IRP condition
Chapter 14 Money,Interest Rates and Exchange Rate
Md = P x L(R,Y)
(14-1)
where:
P is the price level Y is real national income L(R,Y) is the aggregate real money demand
– Changes in the risk of holding money need not cause individuals to reduce their demand for money.
Any change in the risk of money causes an equal change in the risk of bonds.
– A rise in the average value of transactions carried out by a household or firm causes its demand for money to rise.
14-3 Aggregate Money Demand
– The total demand for money by all households and firms in the economy.
– Expected return – Risk – Liquidity
14-2-1 Expected Return
– The interest rate measures the opportunity cost of holding money rather than interest-bearing bonds. A rise in the interest rate raises the cost of holding money and causes money demand to fall.
经济金融术语英汉对照
经济金融术语英汉对照经济金融领域常常涉及大量的专业术语，对于学习和理解这些术语，将英文与中文对照是非常重要的。
下面是一些经济金融术语的英汉对照列表，希望对您有所帮助。
1. Gross Domestic Product (GDP) 国内生产总值GDP是一个国家或地区在特定时间内所生产的所有最终商品和服务的市场价值的总和。
2. Inflation 通货膨胀通货膨胀是指货币供应量增加导致物价水平上升的现象。
3. Deflation 通货紧缩通货紧缩是指货币供应量减少导致物价水平下降的现象。
4. Interest Rate 利率利率是指借贷资金所产生的利息与本金之间的比率。
5. Exchange Rate 汇率汇率是指一种货币与另一种货币之间的兑换比率。
6. Stock Market 股票市场股票市场是指买卖股票的场所，也是企业融资的重要途径。
7. Bond 债券债券是一种证券，表示借款人向债权人承诺在一定期限内支付利息和本金。
8. Foreign Direct Investment (FDI) 外商直接投资外商直接投资是指一个国家的企业在另一个国家的企业中进行的长期投资。
9. Taxation 税收税收是政府从个人和企业获得财政收入的一种方式。
10. Budget Deficit 预算赤字预算赤字是指政府支出超过收入的情况，需要通过借贷或印钞等方式来弥补。
11. Trade Surplus/Trade Deficit 贸易顺差/贸易逆差贸易顺差指一个国家的出口额大于进口额，贸易逆差则相反。
12. Monetary Policy 货币政策货币政策是由中央银行制定和执行的调控货币供应量和利率水平的政策。
13. Fiscal Policy 财政政策财政政策是由政府制定和执行的调控财政支出和税收的政策。
14. Central Bank 央行央行是一个国家的货币发行和货币政策的实施机构。
15. Market Economy 市场经济市场经济是一种以市场配置资源和决定价格的经济体制。
Money, Interest Rates, and Exchange Rates 国际金融英文课件
For a given level of income, real money demand decreases as the interest rate increases.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
14-13
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
14-9
What Influences Aggregate Demand for Money?
1. Interest rates: money pays little or no interest, so the interest rate is the opportunity cost of holding money instead of other assets, like bonds, which have a higher expected return/interest rate.
Aggregate real money demand is a function of national income and interest rates.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
14-12
A Model of Aggregate Money Demand (cont.)
14-10
What Influences Aggregate Demand for Money? (cont.)
3. Income: greater income implies more goods and services can be bought, so that more money is needed to conduct transactions.
外汇的英语名词解释
外汇的英语名词解释外汇（Foreign Exchange）是指不同货币之间的兑换比率和交易市场。
作为全球经济体系中最重要的组成部分之一，外汇市场每天以万亿美元的规模进行交易，是世界上最大的金融市场之一。
在外汇市场中，有许多重要的英语名词，这些名词对于参与外汇交易的专业人士以及普通投资者来说都非常重要。
以下将对其中一些常见的外汇英语名词进行解释。
1. Exchange rate（汇率）汇率是两种货币之间的兑换比率。
通常情况下，汇率的变动是由多种因素决定的，包括经济因素、政治因素和市场供求关系等。
汇率的变动直接影响着国际贸易和投资，并对经济活动产生深远影响。
2. Currency pair（货币对）货币对是在外汇市场上交易的两种货币的组合，用于表示一种货币在另一种货币中的价值。
例如，EUR/USD表示欧元兑美元的交易。
在外汇市场上，常见的货币对包括EUR/USD、GBP/USD、USD/JPY等。
3. Base currency（基准货币）和quote currency（报价货币）在货币对中，基准货币是被计价的货币，而报价货币是用来计价的货币。
以EUR/USD为例，欧元是基准货币，美元是报价货币。
汇率表达的是一单位基准货币可以兑换成多少单位的报价货币。
4. Pip（点）Pip是外汇市场中最小的价格变动单位，通常是货币对的第四位小数点。
例如，EUR/USD从1.2000上涨到1.2001，涨了1个pip。
Pip的变动是外汇交易盈亏计算的基础。
5. Bid price（买入价）和ask price（卖出价）买入价和卖出价分别表示在外汇市场上进行买入和卖出交易时的价格。
买入价是交易商愿意支付的价格，而卖出价是交易商愿意出售的价格。
两者之间的差价被称为spread（点差），是交易商的利润来源之一。
6. Margin（保证金）保证金是投资者参与外汇交易时需要提供的一定资金，用于覆盖潜在的亏损。
外汇交易通常采用杠杆，也就是以较小的保证金金额进行较大规模的交易。
国际金融课后习题答案
You are given the following information about a country’s international transactions during a year: a.Calculate the values of the country’s goods and services balance,current account balance,and official settlements balance?a.Merchandise trade balance: $330 - 198 = $132Goods and services balance: $330 - 198 + 196 - 204 = $124Current account balance: $330 - 198 + 196 - 204 + 3 - 8 = $119Official settlements balance: $330 - 198 + 196 - 204 + 3 - 8 + 102 - 202 + 4 = $23b.What are the value of the change in official reserve assets(net)?Is the country increasing or decreasing its net holdings of official reserve assets?b.Change in official reserve assets (net) = - official settlements balance = -$23The country is increasing its net holdings of official reserve assets.What are the major types of transactions or activities that result in supply of foreign currency in the spct foreign exchange market?Exports of merchandise and services result in supply of foreign currency in the foreignexchange market. Domestic sellers often want to be paid using domestic currency, whilethe foreign buyers want to pay in their currency. In the process of paying for these exports,foreign currency is exchanged for domestic currency, creating supply of foreign currency.International capital inflows result in a supply of foreign currency in the foreign exchangemarket. In making investments in domestic financial assets, foreign investors often startwith foreign currency and must exchange it for domestic currency before they can buy thedomestic assets. The exchange creates a supply of foreign currency. Sales of foreignfinancial assets that the country's residents had previously acquired, and borrowing fromforeigners by this country's residents are other forms of capital inflow that can createsupply of foreign currency.You have access to the following three spot exchange rates:＄0.01/YEN＄0.20/KRONE25YEN/KRONEYou strat with dollars and want to end up with dollarsa.hoe would you engage in arbitrage to profit from these three rates?what is the profit for each dollar used initially?a.The cross rate between the yen and the krone is too high (the yen value of the krone is toohigh) relative to the dollar-foreign currency exchange rates. Thus, in a profitabletriangular arbitrage, you want to sell kroner at the high cross rate. The arbitrage will be:Use dollars to buy kroner at $0.20/krone, use these kroner to buy yen at 25 yen/krone, anduse the yen to buy dollars at $0.01/yen. For each dollar that you sell initially, you canobtain 5 kroner, these 5 kroner can obtain 125 yen, and the 125 yen can obtain $1.25. Thearbitrage profit for each dollar is therefore 25 cents.b.As a result of this arbitrage,what is the pressure on the cross-rate between yen and krone?what must the value of the cross-rate be to eliminate the opportunity for triangular arbitrage?b.Selling kroner to buy yen puts downward pressure on the cross rate (the yen price ofkrone). The value of the cross rate must fall to 20 (=0.20/0.01) yen/krone to eliminate theopportunity for triangular arbitrage, assuming that the dollar exchange rates areunchanged.Explain the nature of the exchange rate risk for each of the following,from the perspective of the U.S frim or person.in your answer,include whether each is a long or short position in foreign currency.a.a small U.S firm sold experimental computer computer compoments to a Japanese firm,and it will receive payment of 1 million yen in 60 days.a.The U.S. firm has an asset position in yen—it has a long position in yen. To hedge itsexposure to exchange rate risk, the firm should enter into a forward exchange contractnow in which the firm commits to sell yen and receive dollars at the current forward rate.The contract amounts are to sell 1 million yen and receive $9,000, both in 60 days.The current spot exchange rate is ＄1.20/euro.the current 90-day forward exchange rate is＄1.18/euro.you expect the spot rate to be ＄1.22/euro in 90 days.how would you speculate using a forward contract?if many people speculate in this way,what pressure is placed on the walue of the current forward exchange rate?Relative to your expected spot value of the euro in 90 days ($1.22/euro), the currentforward rate of the euro ($1.18/euro) is low—the forward value of the euro is relativelylow. Using the principle of "buy low, sell high," you can speculate by entering into aforward contract now to buy euros at $1.18/euro. If you are correct in your expectation,then in 90 days you will be able to immediately resell those euros for $1.22/euro,pocketing a profit of $0.04 for each euro that you bought forward. If many peoplespeculate in this way, then massive purchases now of euros forward (increasing thedemand for euros forward) will tend to drive up the forward value of the euro, toward acurrent forward rate of $1.22/euro.The following rates are available in the markets:Current spot exchange rate:＄0.500/SFrCurrent 30-day forward exchange rate:＄0.505/SFrAnnualized interest rate on 30-day dollar-denominated bonds:12%(1.0% for 30 days)Annualized interest rate on 30-day Swiss franc-denominated bonds:6%(0.5% for 30 days)a.Is the swiss franc at a forward premium or discount?a.The Swiss franc is at a forward premium. Its current forward value ($0.505/SFr) is greaterthan its current spot value ($0.500/SFr).b.should a U.S-based investor make a covered investment in swiss franc-denominated 30-day bonds,rather than investing 30-day dollar-denominated bonds?Explain.b.The covered interest differential "in favor of Switzerland" is ((1 + 0.005) (0.505) / 0.500)- (1 + 0.01) = 0.005. (Note that the interest rate used must match the time period of theinvestment.) There is a covered interest differential of 0.5% for 30 days (6 percent at anannual rate). The U.S. investor can make a higher return, covered against exchange raterisk, by investing in SFr-denominated bonds, so presumably the investor should make thiscovered investment. Although the interest rate on SFr-denominated bonds is lower thanthe interest rate on dollar-denominated bonds, the forward premium on the franc is largerthan this difference, so that the covered investment is a good idea.c.Because of covered interest arbitrage,what pressures are placed on the various rates?if the only rate that actually changes is forward exchange rate,to what value will it bu driven?c.The lack of demand for dollar-denominated bonds (or the supply of these bonds asinvestors sell them in order to shift into SFr-denominated bonds) puts downward pressureon the prices of U.S. bonds—upward pressure on U.S. interest rates. The extra demandfor the franc in the spot exchange market (as investors buy SFr in order to buySFr-denominated bonds) puts upward pressure on the spot exchange rate. The extrademand for SFr-denominated bonds puts upward pressure on the prices of Swissbonds—downward pressure on Swiss interest rates. The extra supply of francs in theforward market (as U.S. investors cover their SFr investments back into dollars) putsdownward pressure on the forward exchange rate. If the only rate that changes is theforward exchange rate, this rate must fall to about $0.5025/SFr. With this forward rate andthe other initial rates, the covered interest differential is close to zero.Why is testing whether uncovered interest parity holds for actual rates more difficult than testing whether covered interest parity holds?In testing covered interest parity, all of the interest rates and exchange rates that areneeded to calculate the covered interest differential are rates that can observed in the bondand foreign exchange markets. Determining whether the covered interest differential isabout zero (covered interest parity) is then straightforward (although some more subtleissues regarding timing of transactions may also need to be addressed). In order to testuncovered interest parity, we need to know not only three rates—two interest rates and thecurrent spot exchange rate—that can be observed in the market, but also one rate—theexpected future spot exchange rate—that is not observed in any market. The tester thenneeds a way to find out about investors' expectations. One way is to ask them, using asurvey, but they may not say exactly what they really think. Another way is to examinethe actual uncovered interest differential after we know what the future spot exchange rateactually turns out to be, and see whether the statistical characteristics of the actualuncovered differential are consistent with an expected uncovered differential of aboutzero (uncovered interest parity)the following rates currently exist:spot exchange rate:＄1.000/euro.Annual interest rate on 180-day euro-denominated bonds:3%Annual interest rate on 180-day U.S dollar-denominated bonds:4%Ibvestors currently expect the spot exchange rate to be about＄1.005/euro in180 days.a.show that uncovered interest parity holds(approximately)at these ratesa.The euro is expected to appreciate at an annual rate of approximately ((1.005 -1.000)/1.000)⊕(360/180)⊕100 = 1%. The expected uncovered interest differential isapproximately 3% + 1% - 4% = 0, so uncovered interest parity holds (approximately).What is likely to be the effect on the spot eschange rate if the interest rate on 180-day dollar-denominated bonds declines to 3%? If the euro interest rate and the expected future spot rate are unchanged,and if uncovered interest parity is reestablished,what will the new current spot exchange rate be?has the dollar appreciated or depreciated?b.If the interest rate on 180-day dollar-denominated bonds declines to 3%, then the spotexchange rate is likely to increase—the euro will appreciate, the dollar depreciate. At theinitial current spot exchange rate, the initial expected future spot exchange rate, and theinitial euro interest rate, the expected uncovered interest differential shifts in favor ofinvesting in euro-denominated bonds (the expected uncovered differential is now positive,3% + 1% - 3% = 1%, favoring uncovered investment in euro-denominated bonds. Theincreased demand for euros in the spot exchange market tends to appreciate the euro. Ifthe euro interest rate and the expected future spot exchange rate remain unchanged, thenthe current spot rate must change immediately to be $1.005/euro, to reestablish uncoveredinterest parity. When the current spot rate jumps to this value, the euro's exchange ratevalue is not expected to change in value subsequently during the next 180 days. Thedollar has depreciated immediately, and the uncovered differential then again is zero (3%+ 0% - 3% = 0)You observe the following current rates:Spot exchange rate:＄0.01/yenAnnual interest rate on 90-day U.S dollar-denominated bonds:4%Annual interest rate on 90-day yen-denominated bonds:4%a.if uncovered interest parity holds,what spot exchange rate do investors expect to exist in 90 days?a.For uncovered interest parity to hold, investors must expect that the rate of change in thespot exchange-rate value of the yen equals the interest rate differential, which is zero.Investors must expect that the future spot value is the same as the current spot value,$0.01/yen.b.a close U.S presidential has just been decided.the candidate whom international investors view as the stronger and more probusiness person won.because of this,investors expect the exchange rate to be＄0.0095/yen in 90 days.what will happen in the foreign exchange market?b.If investors expect that the exchange rate will be $0.0095/yen, then they expect the yen todepreciate from its initial spot value during the next 90 days. Given the other rates,investors tend to shift their investments toward dollar-denominated investments. Theextra supply of yen (and demand for dollars) in the spot exchange market results in adecrease in the current spot value of the yen (the dollar appreciates). The shift toexpecting that the yen will depreciate (the dollar appreciate) sometime during the next 90days tends to cause the yen to depreciate (the dollar to appreciate) immediately in thecurrent spot market.To aid in its efforts to get reelected,the current government of o country decides to increase the growth rate of the domestic money supply by two percentage points.the increased growth rate becomes”permanene”because once started it is difficult to reverse.a.according to the monetary approach,how will this affect the long-run trend for the exchange rate value of the country’s currency?a.Because the growth rate of the domestic money supply (M s ) is two percentage pointshigher than it was previously, the monetary approach indicates that the exchange ratevalue (e) of the foreign currency will be higher than it otherwise would be—that is, theexchange rate value of the country's currency will be lower. Specifically, the foreigncurrency will appreciate by two percentage points more per year, or depreciate by twopercentage points less. That is, the domestic currency will depreciate by two percentagepoints more per year, or appreciate by two percentage points less.b.explain why the nominal exchange rate trend is affected,referring to PPPb.The faster growth of the country's money supply eventually leads to a faster rate ofinflation of the domestic price level (P). Specifically, the inflation rate will be twopercentage points higher than it otherwise would be. According to relative PPP, a fasterrate of increase in the domestic price level (P) leads to a higher rate of appreciation of theforeign currency.A country has a marginal propensity to save of 0.15 and a marginal propensity to import of 0.4 real domestic spending now decreases by＄2 billiona.according to the spending multiplier(for a small open economy),,by how much will domestic product and income change?a.The spending multiplier in this small open economy is about 1.82 (= 1/(0.15 + 0.4)). Ifreal spending initially declines by $2 billion, then domestic product and income willdecline by about $3.64 billion (= 1.82⋅$2 billion)b.what is the change in the country’s imports?b. If domestic product and income decline by $3.64 billion, then the country's imports willdecline by about $1.46 billion (= $3.64 billion⋅0.4).c.if this country is large,what effect will this have on foreign product and income?explainc. The decrease in this country's imports reduces other countries' exports, so foreign productand income decline.d.will the change in foreign product and income tend to counteract or reinforce the change in the first country’s domestic product and income?explaind. The decline in foreign product and income reduce foreign imports, so the first country'sexports decrease. This reinforces the change (decline) in the first country's domesticproduct and income—an example of foreign-income repercussions.。
汇率英文表述例句
汇率英文表述例句汇率英语如下：exchange rate：英/ɪksˈtʃeɪndʒreɪt/ 美/ɪksˈtʃeɪndʒreɪt/。
n.(外汇)汇率;兑换率。
复数：exchange rates。
例句：a high exchange rate took a heavy toll on industry.高汇率使工业蒙受了严重损失。
We've got a fairly unfavourable exchange rate at the moment眼下汇率对我们不利。
He described Britain's entry into the European Exchange Rate Mechanism as an historic move.他将英国加入欧洲汇率机制描述为具有历史意义的一步。
Some analysts predicted that the exchange rate would soon be$ 2 to the pound. 一些分析人士预测，英镑对美元的汇率将很快达到1:2。
This deferral would obviate pressure on the rouble exchange rate.这一延期将消除卢布汇率面临的压力。
Britain's inflation is probably traceable in part to the Chancellor's failure to get the exchange rate right.英国的通货膨胀有一部分大概要归因于财政大臣未能将汇率控制在合理水平。
Due to the floating exchange rate, the United States is fully staffed.因为转向浮动汇率，美国实在是一举多得。
芬斯特拉版《国际宏观经济学》课后习题答案第章
芬斯特拉版《国际宏观经济学》课后习题答案第章Exchange Rates II: The Asset Approach in the Short Run/doc/47f7648732687e21af45b307e87101f69f31fb28.html e the money market and FX diagrams to answer the following questions about therelationship between the British pound (￡) and the U.S. dollar ($). The exchange rate is in U.S. dollars per British pound, E $/￡. W e want to consider how a change in the U.S. money supply affects interest rates and exchange rates. On all graphs, label the initial equilibrium point A.a.Illustrate how a temporary decrease in the U.S. money supply affects the moneyand FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C .Answer:See the diagram below.S-23i $i 1$i 2$2$DR 1DR2E 1E E $/￡M 1US P 1US M 2US P 1US/doc/47f7648732687e21af45b307e87101f69f31fb28.html ing your diagram from (a), state how each of the following variables changesin the short run (increase/decrease/no change): U.S. interest rate, British interestrate, E $/￡, E e $/￡, and the U.S. price level.Answer: The U.S. interest rate increases, the British interest rate does notchange, E $/￡decreases, E e $/￡does not change, and the U.S. price level does notchange./doc/47f7648732687e21af45b307e87101f69f31fb28.html ing your diagram from (a), state how each of the following variables changesin the long run (increase/decrease/no change relative to their initial values atpoint A ): U.S. interest rate, British interest rate, E $/￡, E e $/￡, and U.S. price level.Answer:All of the variables return to their initial values in the long run. This isbecause the shock is temporary, implying the central bank will increase themoney supply from M 2to M 1in the long run./doc/47f7648732687e21af45b307e87101f69f31fb28.html e the money market and FX diagrams from (a) to answer the following questions.This question considers the relationship between the Indian rupees (Rs) and the U.S.dollar ($). The exchange rate is in rupees per dollar, E Rs /$. On all graphs, label the ini-tial equilibrium point A .a.Illustrate how a permanent increase in India’s money supply affects the money andFX markets. Label your short-run equilibrium point B and your long-run equi-librium point C .Answer:See the following diagram. Thick arrows indicate temporary movementwhile thinner ones indicate the movements in the long run. In the short run,prices are ?xed. Therefore the real money supply changes from MS 1to MS 2, thustemporarily lowering the domestic interest rate. In the long run, as prices rise,the real money supply and interest rate return to their original level. In the for-eign exchange market, FR shifts to the right and stays there permanently becauseof an expected depreciation of rupees.S-24Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short Runi Rs i 1Rs i 2Rs1Rs2Rs12E 1E 2E 3M 2INP 2IN E Rs/$M 1IN P 1IN M 2IN P 1IN3.Is overshooting (in theory and in practice) consistent with purchasing power parity?Consider the reasons for the usefulness of PPP in the short run versus the long run and the assumption we’ve used in the asset approach (in the short run versus the long run). How does overshooting help to resolve the empirical behavior of exchange rates in the short run versus the long run?Answer:Y es, overshooting is consistent with PPP. Investors forecast the expected ex-change rate based on the theory ofPPP.When there is some change in the market, the investors know the exchange rate will change to equate relative prices in the long run.This is why we observe overshooting in the short run—the investors incorporate this information into their short-run forecasts. Exchange rates are volatile in the short run.The theory’s implication that there is exchange rate overshooting (in response to per-manent shocks) is one explanation for short-run volatility in exchange rates./doc/47f7648732687e21af45b307e87101f69f31fb28.html e the money market and foreign exchange (FX) diagrams to answer the followingquestions. This question considers the relationship between the euro (€) and the U.S.dollar ($). The exchange rate is in U.S. dollars per euro, E$/€. Suppose that with ?-nancial innovation in the United States, real money demand in the United States de-creases. On all graphs, label the initial equilibrium point A.a.Assume this change in U.S. real money demand is temporary. Using the FX andmoney market diagrams, illustrate how this change affects the money and FXmarkets. Label your short-run equilibrium point B and your long-run equilib-rium point C.Answer: See the following diagram. The long-run values are the same as the ini-tial values because the shock is temporary. Also because the shock is temporary,we assume that the reversal of real money demand occurs before the price leveladjusts—that is, MD returns from MD2to MD1before the price level changes. S-26Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short Run i$i1$i2 $i1$i2$1E1M1US / P1US E2E$/€b.Assume this change in U.S. real money demand is permanent. Using a new dia-gram, illustrate how this change affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.Answer:See the following diagram. In the long run, the price level will have to increase to adjust for the drop in real money demand (assuming the central bank does not change the money supply, M). That is, the nominal interest rate returns to its initial value in the long run. This requires that the price level increase to reduce real money supply. The drop in real money demand will have to be met one-for-one with a drop in real money supply (generated by an increase in the price level). In this case, the expected exchange rate changes because the shock is permanent. Therefore, FR schedule in the forex market also shifts upward.Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short RunS-27i 1$i 2$1E 1E 2E 3E $/€i $i 1$i 2$M 1US / P 1US M 1US / P 2US 2c.Illustrate how each of the following variables changes over time in response to apermanent reduction in real money demand: nominal money supply M US , price level P US , real money supply M US /P US , U.S. interest rate i $, and the exchange rate E $/€.Answer:See the following diagrams.M US P US i $T T nE $/?M US /P US M US /P US22115.This question considers how the FX market will respond to changes in monetarypolicy. For these questions, de?ne the exchange rate as Korean won per Japanese yen,E WON /￥. Use the FX and money market diagrams to answer the following questions.On all graphs, label the initial equilibrium point A .a.Suppose the Bank of Korea permanently decreases its money supply. Illustrate theshort-run (label the equilibrium point B ) and long-run effects (label the equilib-rium point C ) of this policy.Answer:See the following diagram. In the short run, prices are ?xed. Thereforethe real money supply changes from MS 1to MS 2, thus temporarily raising the Ko-rean interest rate. In the long run, as prices fall, the real money supply and interestrate return to their original levels. In the foreign exchange market, FR shifts to theleft and stays there permanently because of an expected appreciation of won.S-28Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short Runi won i 1won i 2won1won2wonM 1K / P 1K M 2K / P 2K M 2K / P 1K 1E 1E 3E 2E won/￥2b.Now , suppose the Bank of Korea announces it plans to permanently decrease its money supply but doesn’t actually implement this policy . How will this affect theFX market in the short run if investors believe the Bank of Korea’s announcement? Answer:See the following diagram. I n this case, interest rates on won-denominated deposits don’t change because the Bank of Korea doesn’t cut the money supply. However, because investors expected the Bank of Korea to cut the money supply, they expect the won will appreciate relative to the yen, causing a decrease in the return on yen-denominated deposits in the short run. Notice theresulting change in the exchange rate is relatively small (compared with the dra-matic decrease we see in [a]).i won i 1won M 1K / P 1K DR 1E 1E 2E won/￥c.Finally, suppose the Bank of Korea permanently decreases its money supply butthis change is not anticipated. When the Bank of Korea implements this policy,how will this affect the FX market in the short run? Answer:In this case, the expected exchange rate is unchanged because the in-vestors didn’t expect the decrease in the money supply.Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short RunS-29i won i 1won i 2won 2won1wonM 1K / P 1K M 2K / P 1K DR 1DR E 1E 2E won/￥/doc/47f7648732687e21af45b307e87101f69f31fb28.html ing your previous answers, evaluate the following statements:i.If a country wants to increase the value of its currency, it can do so (tem-porarily) without raising domestic interest rates.ii.The central bank can reduce both the domestic price level and the value ofits currency in the long run.iii.The most effective way to increase the value of a currency is through sur-prising investors.Answer: Though it is theoretically possible, as shown in (b), it is not a good pol-icy because it is bad for the policy makers reputation in the long run.i.True; shown in (b).ii.False; shown in (a) A reduction in price level implies an exchange rate ap-preciation by PPP .iii.False; shown in (b) and (c) compared with (a). The most dramatic appreci-ation in the won occurs when the reduction in M is coupled with investorsanticipating the appreciation in the won. In general, a policy must be cred-ible for it to have an effect in the long run.6.In the late 1990s, several East Asian countries used limited ?exibility or currency pegsin managing their exchange rates relative to the U.S. dollar. This question considers how different countries responded to the East Asian Currency Crisis (1997–1998).For the following questions, treat the East Asian country as the home country and the United States as the foreign country. Also, for the diagrams, you may assume these countries maintained a currency peg (?xed rate) relative to the U.S. dollar. Also, for the following questions, you need consider only the short-run effects.a.In July 1997, investors expected that the Thai baht would depreciate. That is, theyexpected that Thailand’s central bank would be unable to maintain the currency peg with the U.S. dollar. Illustrate how this change in investors’ expectations af-fects the Thai money market and the FX market, with the exchange rate de?ned as baht (B) per U.S. dollar, denoted E B/$. Assume the Thai central bank wants to maintain capital mobility and preserve the level of its interest rate and abandons the currency peg in favor of a ?oating exchange rate regime.Answer:If Thailand is willing to let its currency ?oat against the dollar, thenThailand’s central bank can maintain monetary policy autonomy and interna-tional capital mobility. See the following diagram:S-30Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short Runi baht i 1bahtM 1T / P 1T ERDR 12E 1E 2E baht/$b.I ndonesia faced the same constraints as Thailand—investors feared I ndonesia would be forced to abandon its currency peg. Illustrate how this change in in-vestors’ expectations affects the Indonesian money market and the FX market,with the exchange rate de?ned as rupiahs (Rp) per U.S. dollar, denoted E Rp /$. As-sume the Indonesian central bank wants to maintain capital mobility and the cur-rency peg.Answer: If Indonesia wants to maintain the currency peg against the dollar and maintain international capital mobility, it will have to give up monetary policy autonomy. In this case, Indonesia has to increase the domestic interest rate to keep investors from dumping their rupiah-denominated deposits for U.S. dollars and move their investments out of Indonesia (this would then cause a depreciation inthe rupiah).i rup i 1rup i 2rup 1rup 2rupM 1I / P 1I M 2I / P 1I 12FR E 1E rupiah/$2c.Malaysia had a similar experience, except that it used capital controls to maintainits currency peg and preserve the level of its interest rate. Illustrate how this change in investors’ expectations affects the Malaysian money market and the FX market,with the exchange rate de?ned as ringgit (RM) per U.S. dollar, denoted E RM/$. Y ou need show only the short-run effects of this change in investors’ expectations.Answer:See the following diagram. In the absence of capital controls Malaysian interest rate would have to rise. However, by preventing investors from taking ad-vantage of arbitrage, Malaysia creates a disequilibrium. The investors require i 2RM to keep their deposits in Malaysia, but they only receive i 1RM . Because of the cap-ital controls imposed by Malaysia, investors cannot withdraw their ringgit-denominated deposits (selling ringgit in exchange for dollars in the FX market).n effect, the foreign market equilibrium diagram shown below does notwork/exist. This allows Malaysia to maintain monetary policy autonomy and a ?xed exchange rate at the same time.Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short RunS-31i RM i 1RM i 2RM 1RM 2RM M 1M / P 1M 12E 1E RM/$/doc/47f7648732687e21af45b307e87101f69f31fb28.html pare and contrast the three approaches just outlined. As a policy maker,which would you favor? Explain.Answer: There is no “correct” answer to this question. The cases above highlight the trilemma because each country can choose a different option depending on their domestic or international priorities. They need to compare the bene?ts of having any two of (a) ?xed exchange rates, (b) monetary autonomy, and (c) in-ternational capital mobility against the cost of not having the third one.7.Several countries have opted to join currency unions. Examples include the Euroarea, the CFA franc union in W est Africa, and the Caribbean currency union. This in-volves sacri?cing the domestic currency in favor of using a single currency unit in multiple countries. Assuming that once a country joins a currency union it will not leave, do these countries face the policy trilemma discussed in the text? Explain.Answer: These countries do face the trilemma because they are committed to main-taining the ?rst policy goal of a ?xed exchange rate. Joining a currency union effec-tively means a country has a ?xed exchange rate without the need for government intervention because the money supply is controlled by aregional central bank for member countries. This effectively reduces the choice to a dilemma between mone-tary policy autonomy versus international capital mobility. T ypically, countries that are parts of a currency union sacri?ce monetary policy autonomy; policy decisions are made jointly rather than independently.S-32Solutions ■Chapter 4(15) Exchange Rates II: The Asset Approach in the Short Run8.During the Great Depression, the United States remained on the international goldstandard longer than other countries. This effectively meant that the United States wascommitted to maintaining a ?xed exchange rate at the onset of the Great Depression.The U.S. dollar was pegged to the value of gold along with other major currencies,including the British pound, the French franc, and so on. Many researchers haveblamed the severity of the Great Depression on the Federal Reserve and its failure toreact to economic conditions in 1929 and 1930. Discuss how the policy trilemma ap-plies to this situation.Answer: The United States was committed to the ?xed exchange rate with gold;consequently, policy makers had to sacri?ce either monetary policy autonomy or cap-ital mobility, just as the trilemma suggests. Based on the information given in thequestion, we can assume that the policy did not respond to the U.S. business cycle(policy makers did not exercise monetary policy autonomy). Thus, if we assume in-ternational capital mobility, the United States could not react to the business cyclewith a monetary expansion until it abandoned the gold standard.9.On June 20, 2007, John Authers, investment editor of the Financial Times,wrote thefollowing in his column “The Short View”:The Bank of England published minutes showing that only the narrowest pos-sible margin, 5–4, voted down [an interest] rate hike last month. Nobody fore-saw this. . . . The news took sterling back above $1.99, and to a 15-year highagainst the yen.Can you explain the logic of this statement? Interest rates in the United Kingdomhad remained unchanged in the weeks since the vote and were still unchanged afterthe minutes were released. What news was contained in the minutes that causedtraders to react? Use the asset approach.Answer: The news item indicates that investors did not expect the decision to leaveinterest rates unchanged would be divisive. They thought that any increases in inter-est rates would happen further in the future. Higher interest rates would lead to anappreciation in the pound sterling. When the minutes showed that interest rate in-creases were more likely than previously thought, investors came to expect an appre-ciation sooner rather than later. This caused an appreciation in the current spot ex-change rate.10.W e can use the asset approach to both make predictions about how the market willreact to current events and understand how important these events are to investors. Consider the behavior of the Union/Confederate exchange rate during the CivilW ar. How would each of the following events affect the exchange rate, de?ned asConfederate dollars per Union dollar, EC$/$a.The Confederacy increases the money supply by 2,900% between July and De-cember of 1861.Answer: The Confederate money supply increases, the exchange rate increases, and the Confederate dollar depreciates.b.The Union Army suffers a defeat in Battle of Chickamauga in September 1863. Answer: Appreciation in the Confederate dollar is expected because a military victory means a stable economy and monetary policy, implying decreased uncer-tainty and risk, the exchange rate decreases, and the Confederate dollar appreci-ates.c.The Confederate Army suffers a major defeat with Sherman’s March in the au-tumn of 1864.Answer: Just the opposite of (b) above: depreciation in the Confederate dollar is expected because of military defeat increases economic and monetary uncertainty and risk; the exchange rate increases, and the Confederate dollar depreciates.。
3 currency interest rate and exchange rate
Aggregate Money Demand
Md = L1(Y) + L2(R) The aggregate demand for money can be expressed by: Md = P x L(R,Y) (14-1)
where: P is the price level（价格） Y is real national income（实际国民收入） L(R,Y) is the aggregate real money demand （实际货币需求）
The money supply and the exchange rate in the long run （货币供给与汇率的长期分析）
Learning Goals
Show how monetary policy and interest rates feed into foreign exchange market 解 释货币政策与利率怎样影响外汇市场 Explain how price levels and exchange rates respond to monetary factors in the long run解释长期情况下，价格水平与汇率如何对 货币因素作出反应 Outline the relationship between the short run and long run effects of monetary policy and explain the concept of short run exchange rate overshooting 解释货币政策的 短期影响和长期影响间的关系，解释短期汇率超调 现象
The effect of increasing the money supply at a given price level is illustrated in Figure 14-4.
CH14Money-Interest-Rates-and-Exchange-rates(国际经济学-
▪ Money as a Unit of Account
• A widely recognized measure of value
▪ Money as a Store of Value
• A transfer of purchasing power from the present into
Copyright © 2003 Pearson Education, Inc.
Slide 14-8
The Demand for Money by Individuals
▪ Risk
• Holding money is risky.
– An unexpected increase in the prices of goods and services could reduce the value of money in terms of the commodities consumed.
Slide 14-3
Introduction
▪ Factors that affect a country’s money supply or
demand are among the most powerful determinants of its currency’s exchange rate against foreign currencies.
central bank.
– The central bank:
– Directly regulates the amount of currency in existence – Indirectly controls the amount of checking deposits issued by
EXCHANGE RATES AND INTEREST RATES
=> £(1/S)(1+i£)
earning i£
=> $ F(1/S)(1+i£) selling £ forward
The rate of return on foreign investment
F(1/S)(1+i£) – 1 i£ + (F-S)/S
3
Example
1-year interest rates on similar assets: 4% in the US and 5 % in the UK
10
More Exercises
Q: Use the CIP or UIP to find how the exchange rate (S) will change if
a. the domestic interest rate rises. b. the foreign interest rate rises. c. the domestic currency is expected to be weaker in the
2
The Rate of Return on Foreign Investment
The return on domestic investment = i$
$1 => $(1 + i$)
The return on covered foreign investment
$1 => £(1/S)
sell $ for £
investment in foreign assets. The (Se-S)/S is called the expected rate of depreciation of
汇率（exchangerate）
汇率（exchangerate）
亦称汇价、兑换率或外汇牌价等。
两种货币兑换的比率或者比价，即以一国货币表示的另一国货币的价格。
汇率作为一种兑换比率，反映了不同国家货币价值的对比关系。
这一比率的确定，在国际交往中具有重要的作用。
作为两种货币折算的标准，它是外汇买卖的基本依据；作为国内和国外价格联系和转换的工具，这旨国际贸易核算的标准。
汇率的确定，也为企业的外币业务会计处理提供了可能。
因为企业将各项以非记账本位币（即会计概念上的外币）计价核算的业务折算为记账本位币入账时，必须要寻找一个能使两种货币相互折算的中间媒介，而这个媒介一定要正确、合理并得到社会公认，以确保企业各项会计要素计价的正确性，这个中间媒介当然只能是外币的汇率。
汇率的分类方法很多。
按以本国货币还是以外国货币作为折算基础来表示本国货币与外国货币的价值比值来划分，沁率有两种标价方法：直接标价法和间接标价法，按照不同货币之间的比价是否经常变动来划分，则可分类固定汇率和浮动汇率；按照外币买卖成交后交割期不同来划分，还可分为即期汇率和远期汇率；按照会计记账当时所采用的汇率或账面汇率；按照银行向客户买入或卖出外币时所采用的汇率来划分，又可分为买入汇率、卖出汇率和中间汇率。
远期外汇名词解释
远期外汇名词解释远期外汇是一种外汇交易方式，指的是买卖双方在约定的未来日期按照约定的汇率进行的外汇交易。
以下是一些与远期外汇相关的重要名词的解释：1. 远期外汇交易（Forward Exchange Transaction）：指买卖双方在约定的未来日期按照约定的汇率进行的外汇交易。
买方同意在未来某个日期购买一定金额的外汇，卖方同意在该日期以约定的汇率出售外汇。
2. 远期外汇合约（Forward Exchange Contract）：是远期外汇交易的正式文件，详细约定了交易的汇率、金额、交割日期以及交割方式等条款。
3. 远期汇率（Forward Exchange Rate）：是指在远期外汇交易中，买卖双方约定的货币兑换比率。
远期汇率由市场供求关系和利率差异等因素决定。
4. 交割日期（Delivery Date）：是远期外汇交易约定的实际交割日期，买卖双方在该日期进行外汇款项的结算和交割。
5. 点差（Spread）：是指买入价和卖出价之间的差额，也被认为是交易商的利润。
远期外汇交易中的点差通常会比即期外汇交易的点差高一些。
6. 远期外汇利率（Forward Exchange Interest Rate）：是指远期外汇交易中，买卖双方约定的货币利率。
远期外汇利率通常会比即期外汇利率高，因为远期外汇交易存在一定的风险。
7. 风险管理（Risk Management）：是指在远期外汇交易中，买卖双方通过采取各种措施来管理可能的外汇风险，包括使用远期外汇交易锁定汇率、购买外汇期权等。
总而言之，远期外汇是一种双方约定在未来某个日期按照约定汇率进行外汇交易的方式，通过远期外汇交易，买卖双方可以管理外汇风险，锁定汇率以确保未来交易的稳定性。
这些名词解释希望能够帮助理解远期外汇交易的相关概念及作用。
Chapter 14 Money Interest Rate and Exchange Rate
E2 E1
2’ 1’
r$ + [E(e) －E] / E 0
R2 R1 R Md/P 1 2
结论：本国货币供给增加， 结论：本国货币供给增加，MS /P 1 则本币贬值；反之， 则本币贬值；反之，本国 S 货币供给减少，本币升值。 货币供给减少，本币升值。M 2/P
Q
U.S. Supply and the Exchange Rate
Q
RMB Supply and the Exchange Rate
E=￥/$ ￥
设，P和Y不变 和 不变
– 当中国中央银行货币供给 增加到M 由MS1增加到 S2时，新的
均衡点由1到达 ， 均衡点由 到达2，此时均 到达 衡利率下降为R 衡利率下降为 2 – 随着本国利率的下降 外 随着本国利率的下降,外 汇市场的均衡点由1’到达 ， 汇市场的均衡点由 到达2’， 到达 因此均衡汇率上升为E 因此均衡汇率上升为 2
0
MS1/P1 MS2/P1 Q
R2
R$ + [E(e) －E] / E R 0 R1 Md/P MS2/P2 1 2 MS2/P1 Q
Exchange rate Overshooting
设，一国初始经济状态为：充分就业，利率为i1与国外相同， 一国初始经济状态为：充分就业，利率为 与国外相同， 货币供应量为M 国内物价P 汇率E 货币供应量为 1，国内物价 1，汇率 1。 再设，货币当局突然增加货币供应， 上升到M 再设，货币当局突然增加货币供应，使M1上升到 2， ∵长期内价格体系是弹性的 国内物价将由P 上升至P 则汇率也将由E 上升至E ∴国内物价将由 1上升至 2，则汇率也将由 1上升至 2， 即本币贬值，外币升值。 即本币贬值，外币升值。 然而，短期内由于价格呈粘性， 然而，短期内由于价格呈粘性， 商品市场价格保持不变，从而使货币的供应过剩， ∴商品市场价格保持不变，从而使货币的供应过剩，导致 国内利率由i 下降至i 国内利率由 1下降至 2， 又由于，利率平价条件有效， 又由于，利率平价条件有效， 套利将导致汇率即期上升，本币贬值，外币升值。 ∴套利将导致汇率即期上升，本币贬值，外币升值。
金融商务口译专业词汇
金融商务口译专业词汇金融商务是一个涉及到各种金融和商务活动的领域，需要掌握大量的专业术语和词汇。
作为一名金融商务口译专业人士，掌握这些专业词汇对于顺利进行口译工作至关重要。
本文将介绍一些常见的金融商务口译专业词汇。
1. 资本市场（Capital Market）：指股票市场和债券市场，是企业和政府融资的重要渠道。
2. 证券（Securities）：指可以进行交易的金融工具，包括股票、债券、期货等。
3. 股票（Stock）：是企业发行的所有权凭证，代表着持有者对企业的所有权。
4. 债券（Bond）：是企业或政府发行的债务凭证，持有者可以获得固定的利息收入。
5. 期货（Futures）：是一种标准化合约，约定在未来某个时间以约定价格买入或卖出某种标的物。
6. 外汇市场（Foreign Exchange Market）：是全球范围内进行货币交易的市场，也是世界上最大的金融市场之一。
7. 汇率（Exchange Rate）：指一种货币兑换成另一种货币的比例，通常以数字表示。
8. 利率（Interest Rate）：是借贷资金的价格，影响着金融市场的投资和融资活动。
9. 保险（Insurance）：是一种经济交易方式，通过支付保费来转移风险，保障人们的生命、财产和健康。
10. 银行（Bank）：是一种金融机构，提供存款、贷款、支付和其他金融服务。
11. 财务报表（Financial Statements）：是企业对外披露的财务信息，包括资产负债表、利润表和现金流量表。
12. 股东（Shareholder）：持有公司股票的个人或机构，享有股权收益和参与公司决策的权利。
13. 分析师（Analyst）：研究和分析金融市场和企业财务状况的专业人士。
14. 风险管理（Risk Management）：通过各种手段和工具来识别、评估和应对金融风险。
15. 国际贸易（International Trade）：不同国家之间的商品和服务交换活动。
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Discount Bond Yield to Maturity
For any n-day discount bond ⎡ F - P ⎤ ⎡ 365 ⎤ i= ⎢ ⎥×⎢ n ⎥ ⎣ P ⎦ ⎣ ⎦ F = Face value of the discount bond P = current price of the discount bond The yield to maturity equals the increase in price over the year divided by the initial price. As with a coupon bond, the yield to maturity is negatively related to the current bond price.
The Global Economy
ECON 5319
Interest Rates and Exchange Rates
William J. Crowder Ph.D.
What is an Interest Rate?
• To understand the concept of an interest rate we need to familiarize ourselves with the concept of present value. • A dollar paid to you one year from now is less valuable than a dollar paid to you today. • That is because a dollar received today can be saved and earn interest.
Fisher Equation
i = ir + π e i = nominal interest rate ir = real interest rate
π e = expected inflation rate
When the real interest rate is low, there are greater incentives to borrow and fewer incentives to lend. The real interest rate is a better indicator of the incentives to borrow and lend.
Bond Prices and Interest Rates
Rate of Return
The payments to the owner plus the change in value expressed as a fraction of the purchase price Pt+1 - Pt C + RET = Pt Pt RET = return from holding the bond from time t to time t + 1 Pt = price of bond at time t Pt+1 = price of the bond at time t + 1 C = coupon payment C = current yield = ic Pt Pt+1 - Pt = rate of capital gain = g Pt
Consol or Perpetuity
• A bond with no maturity date that does not repay principal but pays fixed coupon payments forever
Pc = C / ic Pc = price of the consol C = yearly interest payment ic = yield to maturity of the consol Can rewrite above equation as ic = C / Pc For coupon bonds, this equation gives current yield, which is an easy-to-calculate approximation of yield to maturity
• When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate • The price of a coupon bond and the yield to maturity are negatively related • The yield to maturity is greater than the coupon rate when the bond price is below its face value
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Interest-Rate Risk
Interest-Rate Risk
• Prices and returns for long-term bonds are more volatile than those for shorter-term bonds • There is no interest-rate risk for any bond whose time to maturity matches the holding period
Four Types of Credit Market Instruments • • • • Simple Loan Fixed Payment Loan Coupon Bond Discount Bond
Simple Loan—Yield to Maturity
PV = amount borrowed = $100 CF = cash flow in one year = $110 n = number of years = 1 $110 $100 = (1 + i )1 (1 + i ) $100 = $110 $110 (1 + i ) = $100 i = 0.10 = 10% For simple loans, the simple interest rate equ als the yield to maturity
Fixed Payment Loan Yield to Maturity
The same cash flow payment every period throughout the life of the loan LV = loan value FP = fixed yearly payment n = number of years until maturity FP FP FP FP LV = + + + ...+ 2 3 1 + i (1 + i) (1 + i) (1 + i)n
Simple Present Value
PV = today's (present) value CF = future cash flow (payment) i = the interest rate CF PV = n (1 + i )
Yield to Maturity
• The interest rate that equates the present value of cash flow payments received from a debt instrument with its value today
Future Values
Let i = .10 In one year $100 X (1+ 0.10) = $110 In two years $110 X (1 + 0.10) = $121 or 100 X (1 + 0.10)2 In three years $121 X (1 + 0.10) = $133 or 100 X (1 + 0.10)3 In n years $100 X (1 + i)n
Coupon Bond Yield to Maturity
Using the same strategy used for the fixed-payment loan: P = price of coupon bond C = yearly coupon payment F = face value of the bond n = years to maturity date C C C C F + + +. . . + + P= 2 3 n 1+i (1+i) (1+i) (1+i) (1+i)n
Rate of Return and Interest Rates
• • The return equals the yield to maturity only if the holding period equals the time to maturity A rise in interest rates is associated with a fall in bond prices, resulting in a capital loss if time to maturity is longer than the holding period The more distant a bond’s maturity, the greater the size of the percentage price change associated with an interest-rate change The more distant a bond’s maturity, the lower the rate of return the occurs as a result of an increase in the interest rate Even if a bond has a substantial initial interest rate, its return can be negative if interest rates rise