Financial Markets

Question 1

What is the relationship between market interest rates and the value (price) of a financial instrument?

Answer 1

• Interest rates reflect the amount of interest earned (or paid) on the face value of a financial instrument.
• The amount of money earned/paid over that period of time can be considered the return on that instrument

Question 2

Variable v. Fixed Rate Investments

Answer 2

Most financial instruments represent a commitment of money for a given period of time. The return on those instruments depends on the amount of the instrument and the interest rate. The value of the return, in relative terms, may change as interest rates move upward or downward.

Question 3

What happens to a fixed rate investment if the interest rates increase?

Answer 3

The value of an investment receiving a fixed rate of interest will decrease

Question 4

What happens to a fixed rate investment if the interest rates decrease?

Answer 4

The value of an investment receiving a fixed rate of interest will increase

Question 5

What does the “Spread Concept” illustrate about the financial markets?

Answer 5

illustrates how financial markets price relative risk over time.