Economics/ Interest Rate

Let's consider a three-month U.S. government bond. The interest rate on these loans is very low because it includes only two of the five components. Which two components of the interest rate are most important for a three-month T-bond??

-Positive rate of time preference
-Expected inflation rate
-Transaction costs of screening and monitoring borrowers
-Risk that the borrower will default
- General uncertainty about the future



Hummm. First off, the borrower is the U.S. Government. So the transaction costs of screening seems right out. Second 3 months seems too short a time for me to worry about balancing my current vs future consumption or worry about economic conditions 3 months hence. So, strike 1 and 5. This leaves 2) expected inflation rate, and 4) risk the borrower will default. I would go with these two.

  1. 👍 0
  2. 👎 0
  3. 👁 70
asked by John

Respond to this Question

First Name

Your Response

Similar Questions

  1. Economics

    Now lets consider a different type of government bond, a ten-year inflation indexed bond. Payments on this bond are adjusted for inflation based on the CPI. If inflation rises by five percent, interest payments on this bond will

    asked by John on June 14, 2007
  2. Civics

    The Federal Reserve has a number of ways to influence the supply of money. The Federal Reserve can influence the interest rate that people pay on their loans, regardless of what bank they are using. How might the Fed adjust the

    asked by Carla on May 24, 2017
  3. civics

    The Federal Reserve has a number of ways to influence the supply of money. The Federal Reserve can influence the interest rate that people pay on their loans, regardless of what bank they are using. How might the Fed adjust the

    asked by Nani on June 1, 2015
  4. civics banking

    The Federal Reserve has a number of ways to influence the supply of money. The Federal Reserve can influence the interest rate that people pay on their loans, regardless of what bank they are using. How might the Fed adjust the

    asked by Anonymous on May 26, 2017
  5. statistics

    Investment analysts generally believe the interest rate on bonds is inversely related to the prime interest rate for loans; that is bonds perform well when lending rates are down and perform poorly when interest rates are up. Can

    asked by Tony on July 8, 2013
  6. Stats

    Question 3 Investment analysts generally believe the interest rate on bonds is inversely related to the prime interest rate for loans; that is, bonds perform well when lending rates are down and perform poorly when interest rates

    asked by David on August 20, 2012
  7. civics

    Which of the following best illustrates the government's role in controlling financial institutions? A. The government directly influences the price of stocks in the stock market by taxing purchases of stock. B. The government

    asked by Nani on June 1, 2015
  8. CIVICS PLS HELP MS. SUE

    ich of the following best illustrates the government's role in controlling financial institutions? A. The government directly influences the price of stocks in the stock market by taxing purchases of stock. B. The government

    asked by Anon on May 20, 2016
  9. help

    The interest rate on a second mortgage was5 7/8 % last month. This month the interest rate is 7 3/2 %. How many percentage points has the interest rate increased? Are you sure you mean 7 3/2% ? No lender would write an intereest

    asked by carmen on March 26, 2007
  10. eco

    Suppose a person pays $80 of annual interest on a loan that has a 5 percent annual interest rate. The loan amount is: A. $400. B. $1,600. C. $160. D. $85. 10. Suppose a loan customer is considering two alternative $22,000 loans.

    asked by matt on May 26, 2011

More Similar Questions