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Chapter 3: 12DQ (page 182)

Discuss the relative volatility of short- and long-term interest rates.

Short Answer

Expert verified

Short-term interest rates are more volatile than long-term interest rates.

Step by step solution

01

Meaning of interest rates

The interest rate is the rate charged by a lender to the borrower on the money lent. Interest rate is the income for the lender and the cost of borrowing to the borrower.

02

The volatility of short-term and long-term interest rates

Short-term interest rates are more volatile as these rates are used for controlling inflationary and deflationary pressures of the economy. Long-term interest rates are less volatile as they have long maturity periods and their average rates do not change as radically as short-term interest rates.

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