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The Determination of the Rate of Interest
Published online by Cambridge University Press: 11 August 2014
Extract
References to the rate of interest are frequent. In reality, of course, there is no single rate of interest but only a pattern of yields on individual assets or classes of assets. Nevertheless, it is useful as a first approximation to treat the complex of interest rates as a whole, thus bringing into sharper focus the forces that are common to the determination of the yield of all fixed-interest securities, with the exception of the risk of default. It is in this sense that the term ‘the rate of interest’ is used throughout this paper; consideration of the risk of default has been omitted as a variable that can easily be assimilated into the argument at any stage. The paper aims at making a broad survey of the most important forces that influence the rate of interest in a modern industrial economy where capital is for the most part in private hands. Where the assumption that we can regard interest rates as one united family departs too far from reality the more important qualifications that are needed are indicated very briefly.
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- Research Article
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- Copyright
- Copyright © Institute of Actuaries Students' Society 1955
References
page 68 note * The term ‘investment’ is used throughout this paper in the economist's sense defined here. The verb ‘invest’ and its subject the ‘investor’, on the other hand, refer to the purchase of securities, as in everyday financial speech.
page 70 note * The effect of new issues on the pattern of interest rates will vary according to the relative weights of the various classes of securities issued; but in so far as subscriptions to new industrial securities reduce the amount investors have available for purchasing Government securities, the rate of interest on giltedged stocks will not remain unchanged.
page 76 note * An alteration in Bank rate has a direct effect on money market and shortbond yields; how the yields on long-term securities will react will depend, broadly speaking, on how long investors expect the change in ‘short’ rates to last. The ‘long’ rate is usually much more stable than ‘short’ rates.
page 90 note * An international monetary centre like London might, however, experience an outflow of foreign funds as the rate of interest declined; but this can be regarded as a separate case.
page 91 note * Another and important cause of the fall in interest rates in a slump is the reduction in the need to hold money for ‘current transactions’ and ‘contingencies’. The converse applies in a boom.