TOPIC 4

FINANCIAL MARKETS AND

INTEREST RATE

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 PART 1

FINANCIAL MARKETS

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 CONTENTS

Definition

Classifications

Instruments

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 DEFINITION

•Definition:

•Structure:
Based on security:
Based on market levels:

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 INSTRUMENTS

Money Capital
market market
instruments instruments

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 INSTRUMENTS
LIST OF MONEY MARKETS

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 INSTRUMENTS
LIST OF CAPITAL MARKETS

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 INSTRUMENTS
LIST OF CAPITAL MARKETS

Equities

ves Bo
a t i nd
v
Deri s

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PART 2 - INTEREST RATE

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 CONTENTS

Definition

Classifications

Theories of Interest Rates

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 DEFINITION

The rate of interest is a payment from borrowers to

lenders which compensates the latter for parting with
funds for a period of time and at some risk.

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 CLASSIFICATIONS

• Maturity
1

• Stability
2

• Real value
3

• Calculation
4

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CLASSIFICATIONS
MATURITY

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CLASSIFICATIONS
STABILITY

Fixed interest rates:

Floating interest rates:

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 CLASSIFICATIONS
REAL VALUE

Nominal interest rate (i)

Real interest rate (r)

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CLASSIFICATIONS
FISHER EFFECT

r=i-π

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 CLASSIFICATIONS
CALCULATION

Simple interest rate

Compound interest rate

Effective interest rate

Yield to maturity

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 SIMPLE INTEREST RATE

•Definition:

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 COMPOUND INTEREST RATE

Definition: unpaid interest is added to the balance due. Put

another way, the borrower is charged interest on previous
interest.

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 EFFECTIVE INTEREST RATE

• Definition: Effective Interest Rate is the actual rate that

applies for a stated period of time. The compounding of
interest during the time period of the corresponding nominal
rate is accounted for by the effective interest rate.

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 YIELD TO MATURITY
DEFINITION

•The interest rate that equates the present value of cash

flow payments received from a debt instrument with its
value today

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 YIELD TO MATURITY
FOUR TYPES OF CREDIT MARKET INSTRUMENTS

Simple Loan

Fixed Payment Loan

Coupon Bond

Discount Bond
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 YIELD TO MATURITY
SIMPLE LOAN

•The lender provides the borrower with an amount of

funds, which must be repaid to the lender at maturity date
along with an additional payment for the interest

•For simple loans, the simple interest rate equals the yield
to maturity.

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 YIELD TO MATURITY
FIXED PAYMENT LOAN

•The lender provides the borrower with an amount of funds,

which must be repaid by making the same payment every
period

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 YIELD TO MATURITY
COUPON BOND

•A coupon bond pays the owner a fixed interest payment every year
until maturity and the face value (par value) at maturity.

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 YIELD TO MATURITY
DISCOUNT BOND

•A discount bond (also zero-coupon bond) is bought at a price

below its face value (at a discount), and the face value is
repaid at the maturity date.

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 RATE OF RETURN

•Rate of Return accurately measures how well a person

does by holding a security over a particular time period.
•The return on a bond will not necessarily equal the
interest rate on that bond

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 THEORIES OF INTEREST RATE

Loanable Funds Theory (LFT)

It explains that rate of interest by focusing on the
the willingness to lend and demand for loans to
invest in capital assets.

Liquidity Preference Theory (LPT)

The theory that the rate of return is determined by

the demand for and the supply of money.

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LOANABLE FUNDS THEORY (LFT)

Supply of
Loanable
Funds

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LOANABLE FUNDS THEORY (LFT)

Demand for
Loanable
Funds

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 LOANABLE FUNDS THEORY (LFT)

SHIFTS IN DEMAND FOR LOANABLE FUNDS

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LOANABLE FUNDS THEORY (LFT)

SHIFTS IN SUPPLY OF LOANABLE FUNDS

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 LIQUIDITY PREFERENCE THEORY (LPT)

Money demand is the amount of assets that people are willing to

hold as money (instead of illiquid assets).

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LIQUIDITY PREFERENCE THEORY (LPT)
SUPPLY OF MONEY

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LOANABLE FUNDS THEORY (LFT)

SHIFTS IN THE DEMAND FOR MONEY

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Discuss about the movement of
interest rates in Vietnam

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