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Interest Rate

Posted by Juan on August 31, 2016 with Comments Closedas , , , , , ,

If the interest rate is very low the public wish to possess larger amounts of cash, on the other hand if the interest rate is very high, people would seek to rid the cash with the consequent future profit by not spending money on this moment. Now well, even if the audience wanted to keep or get rid of cash as you vary the interest rate, it would be for the monetary policy of the State compensate the movements in demand for money from the public, so that interest rates rise or fall too much in comparison to the expectations that the State has for the better operation of the economy. Therefore, the interest rate is fixed by the action of the supply and demand for money. Technically the interest rate will have a variation that is intimately related to the prices of bonds and shares. When people have more money that wish to maintain, given your income and the level of the interest rate, it is likely to use the extra junk money to acquire bonds or stocks and other assets. any increase in the demand for stocks and bonds drives up their prices. This simultaneously reduces the interest rate. Why is this happening? The interest rate for an action is its performance by dividends, i.e.

the dividend in dollars divided by the share price. Suppose that initially the price of a stock that pays a dividend of \$5 is \$50, so that the yield from dividends is 0.10 or 10% (5/50). However, if there is a performance in actions demand that forced its price to rise to \$100, the yield from dividends is reduced to 0.05 or 5% (of 5/50 to 5/100) that the \$5 payment in dividends are not affected by changes in the price of the shares. In the same way, the annual payment in dollars for interest on a bond long-term, say \$5 per year, it is not affected by movements in the prices of the bonds. If the price of the bond is originally \$50, the bonus paid a yield interest or interest rate of 10% when the price of the bond rises to \$100, performance is reduced to 5%. If there is a real oversupply of money in circulation (an offer above the needs of individuals for the current level of) (income and interest rates), it is likely that the prices on shares and bonds are rising and therefore the rate of interest declining. The opposite occurs if the offer is less than the needs of society.