this slide define different interest rates and different issues of interest rates and structure.

1. INTEREST RATE, ITS LEVEL, STRUCTURE
AND ISSUES
Presented by:
Rupesh nayaupane
MBA
Apex college

2. BACKGROUND
• Interest-the cost of borrowing
• interest rate-the rate expressed as a percentage of the total sum
borrowed for a stated period of time.
• Regulated by Central bank during the early stage of financial
market development(1955 to 1965).
• But, the country's central bank namely Nepal Rastra Bank
gradually began to liberalize.
• In early mid 1980’s- country’s economic policy liberalized CB
guides BFIs.
• Basically determined by demand and supply of funds.

3. STRUCTURE AND ITS LEVEL DEPENDS ON:
• the behavior of the yield curve
• composition of the maturity structure
• sensitivity of the change in the interest rate, and,
default risk included in matching the level of
interest rate and its relationshipwith the yield
curve.

4. THE FIVE COMPONENTS OF
INTEREST RATES
1. Real Risk-Free Rate
2. Expected Inflation
3. Default-Risk Premium
4. Liquidity Premium
5. Maturity Premium

5. REAL VS NOMINAL INTEREST
RATES
• The nominal interest rate is the amount, in percentage terms,
of interest payable.
• The real interest rate, which measures the purchasing
power of interest receipts, is calculated by adjusting the
nominal rate charged to take inflation into account.
• Nominal interest rate =Real interest rate+inflation.

6. SPREAD RATE AND BASE RATE
• The spread of interest rates=lending rate - deposit rate.
• This covers operating costs for banks providing loans and
deposits. A negative spread is where a deposit rate is higher
than the lending rate
• The base rate is lowest rate at which a bank will charge
interest, also known as the repo rate. The rate is set by the
monetary policy with a view to controlling inflation over the
medium-term.
• Banks usually charge interest at a stipulated figure 'above base
rate'. If the base rate rises, then usually the rate of interest
charged on the loan will rise to preserve the differential. If it
falls, so will the rate on the loan.

7. 2013 2014 2015
July 9.83
Dec 8.86
Jan 8.75 7.49
Feb 8.58 7.51
March 8.55 7.52
Aprl 8.38
May 8.31
Jun 8.23
Jul 8.36
Aug 7.68
Sep 7.90
Oct 7.73
Nov 7.76
Dec 7.44

8. INTEREST RATE STRUCTURE IN
NEPAL
In Nepal, interest rates decisions are taken by the Nepal
Rastra Bank. The official interest rate is the bank rate.
Types/year 2002 2004 2005 2006 2007 2015
T-bills 4.94 3.81 4.79 4.04 2.13 1.3759
Deposit 2-7.5 2-6 1.5-6.05 1.5-6.4 1.5-5.5 3.79(Wtg)
Lending 4-16 4-14.5 4-14.5 5-13.5 5-13.5 9.56(Wtg)
Standing
liquidity
facility
- - 1.5 1.5 1.5 8

9. Nepal Money Last Highest Lowest
Interest Rate 7.00 8.00 5.50
Interbank Rate 1.01 12.83 0.15(2014.
Aug/Dec, 2015 Jan)
Till date:

10. REASONS FOR INTEREST RATE
CHANGES
• Political short-term gain
• Deferred consumption
• Inflationary expectations
• Alternative investments
• Risks of investment
• Liquidity preference
• Taxes
• Banks
• Economy

11. THE EFFECT OF MARKET INTEREST
RATES ON BOND PRICES AND YIELD
Lower market interest rates higher fixed-rate bond prices
lower fixed-rate bond yields
Financial Term Today One Year Later ↓
Market Interest Rate 3% 2%
Coupon Rate (semi-annual
payments)
3% 3%
Face Value $1,000 $1,000
Maturity 10 years 9 years remaining
Price $1,000 $1,082
Yield to Maturity 3% 2%

12. ISSUES:
• Elasticity of substitution
• Output and unemployment
• Excess liquidity
• Money and inflation

13. RELATIONSHIP BETWEEN INFLATION
AND INTEREST RATES
Interest rates, more people are able to borrow more money. The result is that
consumers have more money to spend, causing the economy to grow and
inflation to increase. The opposite holds true for rising interest rates. As interest
rates are increased, consumers tend to have less money to spend. With less
spending, the economy slows and inflation decreases.
Interest rates affect the rise & fall of inflation?
Like in demand-pull theory, Lower interest rates put more borrowing power in
the hands of consumers. And when consumers spend more, the economy grows,
naturally creating inflation.
If the central bank decides that the economy is growing too fast (which is a bad
sign in the long term), They will try to minimize the effect of it by increasing the
interest rates and vice versa, this rising interest rates in turn will encourage
people to save more and borrow less thus reducing the amount of money in
circulation in the market. Lesser money in the market makes it difficult to buy
the goods and services thus slowing down the rise in price.
In short, stable economy is a healthy economy with right wages and less
unemployment.

14. INFLATION IN NEPAL
The inflation rate in Nepal was recorded at 10.40 percent in
November of 2015. Inflation Rate in Nepal averaged 8.36
percent from 1964 until 2015, reaching an all time high of 30.42
percent in May of 1966 and a record low of -11.54 percent in
May of 1967. Inflation Rate in Nepal is reported by the Nepal
Rastra Bank.
Actual Previous Highest Lowest Dates Unit Frequency
10.40
(Nov
2015)
8.30 30.42
(May
1966)
-11.54
(May
1967)
1964 -
2015
percent Monthly

15. THANK YOU!!!!!!!!