3

Interest Rates

LEARNING OBJECTIVES

After completing this chapter, you will be able to answer the following questions:

  • What is interest rate?

  • What is meant by future value and present value?

  • How are they calculated?

  • What is effective interest rate for different compounding periods?

  • What is meant by risk-free rate? How is it estimated?

  • What is meant by forward rate?

  • How are forward rates estimated?

BOX 3.1 Keynes on Interest Rate

“Thus, the rate of interest at any time, being the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it. The rate of interest is not the ‘price’ which brings into equilibrium the demand for resources to invest with the readiness ...

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