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Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 17
Chapter 4
Understanding Interest Rates
In my years of teaching money and banking, I have found that students have trouble with what I
consider to be easy material because they do not understand what an interest rate is: that it is
negatively associated with the price of a bond, that it differs from the return on a bond, and that
there is an important distinction between real and nominal interest rates.
This chapter spends more time on these issues than does any other competing textbook.
Furthermore, it contains many numerical applications to drive home the concepts. My experience
has been that giving this material so much attention is well rewarded. After putting more
emphasis on this material in my money and banking courses, I witnessed a dramatic
improvement in students’ understanding of bank asset and liability management, portfolio
choice, models of the demand for money, and other topics in monetary theory. I have also found
that students very much enjoy this chapter because it is so useful to them in their careers.
An appendix to the chapter, which can be found in MyLab Economics, provides more detail on
how interest-rate risk can be measured with the concept of McCauley’s duration. This is a basic
financial tool that is used by practitioners and so will be of great interest to students who plan
