Chapter 2 The Financial Market and Interest Rates Chapter Objectives

Chapter Objectives

• Understand the rate-of-return relationships among various classes of financing vehicles that persist in the financial markets.
• Be acquainted with recent interest rate levels and the fundamentals of interest rate determination.
• Explain the popular theories of the term structure of interest rates.
• Understand the relationships among the multinational firm, efficient financial markets, and the inter-country risk.

Principles Used in this Chapter

Principle 1: The Risk-Return Tradeoff - We Won’t Take on Additional Risk Unless We Expect to Be Compensated with Additional Return.

Principle 6: Efficient Capital Markets - The Markets are Quick and the Prices Are Right.

Principle 10: Ethical Behavior Is Doing the Right Thing, and Ethical Dilemmas Are Everywhere in Finance.

Federal Funds Rate

• Short-term market rate of interest
• Serves as a sensitivity indicator of the direction of future changes in interest rates