# ECON 435: Inflation and interest rates

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ECON 435 > **ECON 435: Inflation and interest rates**

## Contents

## Interest rate risk

- Depends on time to maturity
- Size of coupon

## Calculating rate of return

- R = the nominal return
- r = the real return
- h = the inflation rate

According to the fisher effect: 1 + R = (1 +r) x (1 + h)

Since 1 + R = 1 + r + h + r x h and r x h approx. 0 r appoximates R - h (all this is on a slide)

## The term strucutre of interest rates

- the relationship between time-to-maturity and the nominal yield of default-free, zero-coupon bonds.
- See slide for details
- Note, interest rate premium is always increasing over time
- buy a longer life bond, the interest rate will be higher
- Inflation premium is increasing over time in boom, decreasing over time in a recession (see graph)

- Note, interest rate premium is always increasing over time

## Lecture slides

- Get lecture slides [here]