FIN 701 Lecture Notes - Lecture 5: Interest Rate Risk, Federal Funds Rate, Loanable Funds
13 Apr 2016
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Document Summary
Since 1991, the bank of canada, canada"s central bank, has carried out monetary policy actions based on a target range for inflation. As long as competitive forces allowed to operate freely in financial system, equilibrium interest rate for that security is i* If forecasts inflation below target rate, lowers target overnight rate so money is cheaper; if forecasts inflation above target rate, raises target overnight rate so money is expensive: operating band: range (0. 5% wide) overnight rates charged by boc. Federal funds rate rate charged by u. s. federal reserve on overnight loans to fis o o. Federal reserve actions targeted at short-term rates but usually feeds through to whole structure of interest rate. Influenced by the us federal funds rate, global interest rates, economic conditions. Bank rates are generally higher than federal fund rates: reflects bank of canada"s focus on us/canadian dollar exchange rate and flow of funds between the two countries as a result of interest rate differentials.
