2. Cost of Money
• Money can be obtained from debts or equity
both of which has a cost
– Cost of debt = interest
– Cost of equity = dividends
• What is cost for the borrowers of funds is
the return for lenders or investors.
– Return for bond or debt investors = interest,
capital gains
– Return for equity investors = dividends, capital
gains.
3. Fundamental factors affecting
“Cost of Money”
• Production Opportunities: The investment opportunities in
productive (cash-generating) assets.
• Time preference for consumption: The preference of
consumers for current consumption as opposed to saving for
future consumption.
• Risk: In a financial market context, the chance that an
investment will provide a low or negative return (i.e.
uncertainty of the future).
• Inflation: The amount by which prices increase over time
mostly due to the devaluation of currency.
23. Macroeconomic Factors that
influence Interest Rate levels
• Monetary Policy
• Federal Budget deficit or surplus
• International Factors
• Level of business activity
24. Monetary Policy
• Central banks like Bangladesh Bank and
Federal Reserves control money supply in the
economy.
• Too much supply will reduce the short-term
interest rates and increase the long-term
rates.
• Too little supply will have the opposite effect
25. Fiscal Policy
• Government makes federal budgets annually,
which is the basis of the country’s fiscal
policy.
• A deficit in the budget means government
have to borrow funds to cover it up and this
increases the demand for funds and thus the
interest rates.
• Sometimes government forces the central
bank to print in more money thus increasing
the supply and reducing the short-term rates.
26. International Factors
• Foreign Trade Deficit is a situation that exists
when a country imports more than it exports.
– Whenever there is deficit, it means borrowing
becomes necessary and this effects the interest
rates.
• Interest rates in other countries affect
the borrowings of local companies,
involved in foreign trade, and thus it
affects the local interest rates.
27. Business Activity
• Business activities include investments in new
ventures or expansion
• When there is a collective increase in business
activities in a country, then demand for funds
increases which also increase the short-term interest
rates.