Financial Management: Core Concepts, Third Edition

5.7 A Brief History of Interest Rates and Inflation in the United States

The four major components of interest rates vary over time. Thus, nominal interest rates vary across the same investment or loan over time. For example, interest rates change daily on mortgage and car loans, government bonds, corporate bonds, and other financial assets. During the early 1980s, interest rates on home mortgages were as high as 16%. Today rates are around 4%, back near some of the all-time-low rates. How much do interest rates vary over time, and to what extent do the swings in the interest rate components of inflation, default premium, and maturity premium contribute to the variation in interest rates? By looking at historical interest rates, we can get a ...