money market interest rates IMPACT ON HOUSEHOLD ECONOMY

2007-03-08 10:33:40

( Financial )



Money market trades any form of money that can be used as an investment for present or future earnings. Currencies, bonds, securities, and loans are instruments traded in money market. Money market interest rates are the prices of these instruments. It also help in determining the level of savings interest rates banks will offer.

Money market interest rates indicate the present price of these money market instruments which are expected to increase in the future. The increase in money market interest rates determine the rate of earnings investors will get from investing in these instruments.

Inflation and Interest Rates

Inflation is the increase in the supply of money in the market without the corresponding increase in the demand for money which results in the loss of its value in the market. It also means an increase in the prices of commodities in the market. Thus, money market traders use inflation to determine what level of interest rates they are willing to trade money market instruments. Money market interest rates must be higher than the rate of inflation for traders to profit from their investments.

Loans and Interest Rates

Borrowers will pay higher amount of interest repayments when they take loans when interest rates are high. They will pay more money in the future for money borrowed at present. Also, a loan with flexible interest rates during its loan term has the risk of posting higher interest rate when interest rate in the market rises. Thus, businesses that are not prepared for increase in interest rates will have to face the risk of insolvency or bankruptcy if they are not unable to meet loan and interest repayments.

Bonds and Interest Rates

Changes in interest rates affect the value of bonds in the market. Prices of bonds usually fall when interest rates rise. The prices of bonds fall when interest rates rise. The change of bond prices relative to the change in interest rates can easily be monitored since bonds are traded publicly where its prices are quoted daily.

Money market interest rates generally affect prices of financial investments. Prices of loans are determined by the level of interest rate in the market. Since many individuals are taking out loans for their financial needs, interest rates in the money market must also be a concern to them.


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