1. Inflation & Interest Rates
How are they related?
10-Year Treasury Bond
1.9% .

2. Interest Rates The Federal Reserve controls short term interest rates
Reflect the cost of borrowing money (or benefit of saving it!)
There are short term & long term interest rates
The Federal Reserve controls short term interest rates
Level of expected inflation determines long term interest rates
Low interest rates are critical for a healthy economy (GDP)
As interest rates ↑ => cost of borrowing money ↑

3. Why Inflation is Bad? Difficult for Business to plan
price goods/services
Lowers value of our currency
Lowers purchasing power
Raises long term interest rates

4. Investments & Inflation
Inflation affects your return on any investment
If stocks or bonds return +10.0% how much has your purchasing power increased?
“It Depends” on the rate of inflation!

5. What is the real interest rate?
Nominal Interest rates measures change in dollars
Real Interest rates measure change in purchasing power
Bond Purchase $1,000,000
Nominal Interest Rate %
Nominal dollars per year: $60,000 (interest per year)
What is the real interest rate?

6. Nominal Interest Rate = Real Interest Rate + Expected Inflation
Bond Purchase $1,000,000
Nominal Interest Rate %
Nominal dollars per year: $60,000 (interest per year)
Reworking above formula: Real = Nominal – Expected Inflation
Therefore if expected inflation = 2.0%
The real interest rate is 4.0%

7. Mortgage Interest Rate
6.75%
$200, Year Loan
6.75% = $1,300 per month
4.25% = $985 per month
4.25%

8. Real vs. Nominal Interest Rates
As inflation expectations rise =>
nominal interest rates rise
Interest Rates
(percent
per year)
15%
Nominal interest rate 10 5
Think!:
How can real
Interest rates
be negative?
Real interest rate = Nominal - CPI 5
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9. Innovation in Schools?
Charter
School

10. Movies on Charter Schools