Next lesson. Current timeTotal duration Google Classroom Facebook Twitter. Video transcript In our planned expenditure remodel we've been assuming that planned investment is fixed. What I want to do in this video is think about how real interest rates drive planned investment.
Think about the function investment as a function of real interest rates. Planned investment as a function of real interest rates. Talking about real interest rates, I'm really just talking about nominal interest rates factoring out or discounting what's going on with inflation. There's other videos where we go into more depth about that.
Another thing if there were no inflation real and nominal rates would be the same thing. I want to tackle it with a very tangible example. Let's say this up coming year there's a bunch of potential planned projects. Let's call this projects. Theses are potential investments. You have projects, and then you have some level of expected return.
Each of the people who are thinking about these projects, they all have their spreadsheets out, and they've taken in risk and probabilities and all of the rest. They've come up with their expected return numbers. I'll do a couple more. Let's say initially in one state of affairs interest rates are relatively high. These are the real expected returns. Which of these projects will actually be invested in? Which of the ones will people actually do?
If they have the cash they would definitely do this. I'll make money off of that. Project A will definitely be done. What about project B? Actually, I would not do project B. I'll just say I would not do anything that has a even a lower real return. I wouldn't do B, and I definitely wouldn't do all these things that get a lower return. When I have high interest rates right over here the only thing I would do is project A.
Let's think about what would happen if interest rates went down. If real interest rates went down. Let's say real interest Real interest rates go down to Once again, project A you are definitely going to do. Investors should consult with their investment professional for advice concerning their particular situation. Bank, U. Bancorp Investments and their representatives do not provide tax or legal advice.
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Financial IQ Categories. Financial IQ. Before you go, be sure you know: This link takes you to an external website or app, which may have different privacy and security policies than U. How do interest rates affect investments? When the Federal Reserve changes interest rates, it can affect your portfolio. Interest rates The Federal Reserve Fed has a dual mandate: to promote maximum employment and price stability.
If you hold this bond to maturity, you should still receive percent of its original par value, barring a default by the issuer. Fluctuating interest rates and market rates: When interest rates fluctuate, the market rate of a bond fluctuates along with it. But not all bonds are affected equally: Bonds with shorter maturities may be less affected by interest rate fluctuations, while bonds with longer maturities will generally incur a greater paper loss.
Short-term changes vs. Bond price decreases will likely be offset by bond price increases at a later date.
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