Share
Explore BrainMass

Inflation and interest rates.

What is the relationship between inflation and interest rates? How does this relationship affect asset prices? How does the unemployment rate affect interest rates? How do changes in interest rates affect the balance of payments?

What is the difference between systematic and unsystematic risk? How is the beta coefficient used to assess risk? Is it better to maximize return or minimize risk?  Why?

What factors must be taken into consideration when creating an investment portfolio? How must a portfolio's components be weighted? Is it important to calculate the weighted average risk? Why or why not?

Solution Preview

1. What is the relationship between inflation and interest rates? How does this relationship affect asset prices? How does the unemployment rate affect interest rates? How do changes in interest rates affect the balance of payments?

Recall from the economic definition that inflation is the increase in prices. In finance, inflation rates affect interest rates directly. Most loan approvals state the fact that the interest rate tracks the risk-free rate or the inflation rate. Overall, the interest rates are usually greater because inflation rates are built in.

Increased interest rates would imply that asset prices would be generally higher. This is primarily of the fact that most securities prices are determined by the underlying interest expected to be earned in the future.

The balance of payments is a statistical analysis of ...

Solution Summary

Inflation and interest rates are discussed.

$2.19