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SECTION IV
The Role of Money, Interest
Rates, Yield Curves and The
Term Structure of the Interest
Rate
Definition and Structure of Interest
Rates
Formation of Balance Interest Rate in the
Market
Definition and Structure of Interest
Rates
Each asset will have two prices:
Purchase price
Rental price
⚫A person who does not need an asset can sell or rent that asset.
Considering that this man acted rationally, it should be expected that if
the sale price of the property and the current value of the rents that that
property will receive during its expected life are the same, it will be
indifferent between the decisions to sell or rent.
⚫If the current value of the rental income exceeds the sale price, the
owner of that asset will rent it. The rental of money, in other words,
lending or borrowing money is evaluated within the same logical
framework as renting goods.
⚫If we can borrow 100 billion TL and buy 10 assets, and we can buy 10
assets with TL 100 billion at the end of the year, there is no loss.
However, a fixed rent of the purchasing power of the money must be
paid (real interest). On the other hand, if 9 assets can be bought with
TL 10 billion after a year, the annual devaluation (inflation effect) will be
10%. The rent to be claimed is real interest plus 10% depreciation rate
...
Definition and Structure of Interest
Rates
Nominal Interest Rate: Interest rate containing
risk premiums. The nominal interest rate
consists of several elements. These factors
determine the size of the nominal interest:
Definition and Structure of Interest
Rates
Nominal interest (i) = R + IP + DRP + LP +MP
R=Real Interest
IP= Inflation premium
DRP= Non-Payment Risk Premium
LP= Liquidity Premium
MP= Maturity Premium
Definition and Structure of Interest
Rates
Risk-Free Rate: The yield on the treasury bill in
an environment without inflation.
Inflation Premium: The rate of inflation that
