Question

How do interest rates affect our lives?

Interest rates are one way to express the price, or cost, of money obtained from someone else. For example, your credit card lends you money every time you make a purchase. Think about how interest rates affect your personal financial behavior with regard to spending and saving. Think also about the relationship between changing interest rates and longer-term interest-bearing securities (bonds, mortgages, etc.), and how interest rates affect our lives in general.

Answer all of the questions below in your own words. There are no wrong answers, but you must justify your opinions. Your answers must be well thought out, and well-written.

Would appreciate a brief response to each of the bullet points.

• What do you think will happen with interest rates in the coming years? Do you expect them to continue to rise, and what economic conditions might influence these changes?
• A credit score is a number ranging from 300 to 850 that essentially represents the probability that someone will pay their bills and are widely used by lenders to determine the interest rate that you will pay (for example, on a car or home loan) and your credit limit. Do you know your credit score? You do not need to disclose it, but what can you do to improve it?
• What is the current rate (approximately) for a 30-year fixed-rate mortgage? How will rising or falling interest rates affect a future home purchase? In what situation might you prefer a variable rate mortgage?
• Suppose that you inherited some 2.25% US Treasury bonds from your grandfather that mature in 2027. Although they were originally purchased at par (and will mature at $1,000), they currently have a market value of around $950 each. If you believe that interest rates will continue to rise, should you sell, hold, or try to buy more? Explain why.

Answer 1

Interest rates prevailing in the market gives us overall idea about the economy.

Suppose a country is suffering from high inflation then the central bank of the country might decide that to rise the interest rate because as interest rate rises loans becomes costier flow of money in the economy slows down and which inturn controls the price rise and inflation.

Similarly when the economy is suffering from recession then the central bank might decide to lower the interest rates as to increase the flow of money.

In the near future as the inflation is rising it is estimated that interest rate will rise.

One should regularly repay the loans , pay the credit card bill regularly , have sufficient credit limit for credit card . Make inquiry of loans only when you need them , these things needs to be done to improve credit limit.

Rising interest rate make mortage more costier people will tend to take less loans for housing as a result housing price declines. Excat oppsite happens when the interest rate falls. Variable mortage is beneficial when you see the rates to fall in future or in stable economy.

One should sell the bond is one envisage rising interest rate because as the interest rate rise bond price declines.