Why Interest Rates Are Increasing

Though still extremely low by many measures, the 30-year fixed rate mortgage averaged 4.12
percent for the week, up from 3.94 percent last week, according to a Freddie Mac survey. The
Federal Reserve released its post-assembly policy statement at 12:30 P.M. eastern time after the
Federal Open Market Committee (FOMC) finished its two-day assembly. Ahead of the Federal
Reserve's statement, government-sponsored Freddie Mac pronounced fixed mortgage rates held
steady as the financial markets speculated there would be additional stimulus. As a component of so
called QE2, the Fed reinvested in securities purchased during QE1 and bought $600 billion in longterm Treasury securities. However, Misra said the markets happen to be behaving as though they
don't consider the Fed.
Torralba said QE2 lowered long-term interest rates by less than the first round of quantitative
easing, which commenced in late 2008, at the height of the financial crisis. The yield to maturity
calculation includes the bond's current market price, par value, coupon interest rate and time to
maturity. Certainly one of the easiest approaches to see this concept in activity is really to consider
the worthiness of a zero-coupon bond in a variable interest rate environment. The market believes
the Fed is already tapering off its quantitative easing program.
A zero-coupon bond means the bond does not distribute interest payments during the life of the
bond. Many bond computations will involve interest rates, coupon rates, payments and frequencies
along with other factors which boost the computation's complexity. Generally, investors are
constantly seeking the best rate of return for each unit of risk they take on. If present interest rates
were to increase to 5 percent, then having a zero-coupon bond that is merely generating 3 percent
becomes less alluring. Another means to view this relationship in action would be to add on a coupon
(interest) rate. In accordance with the Federal Reserve, the typical 48-month new car loan rate is
4.87%.
For instance, Matt and Amy have been following the news and notice that the MG Corporation is
raising capital by issuing bonds. This all sounds good to Matt, so he determines to buy the bond Amy
decides to hold off, because she thinks that interest rates will grow in the next few weeks, as well as
with this example, she's right. You may get a complete graph of rates for federal student loans in the
Department of Education's web site.
As you'll imagine, if interest rates fell to 2 percent and Matt desired to sell his bond, his could sell at
a premium or above par value. This really is only another means to illustrate the inverse associations
between interest rates and bond costs, and remind you to look at the ups and downs before jumping
into the bond market. In case you have federal student loans or strategy on using them to fund your
education, understand that you can not shop around for rates since they're set under the federal
Direct Loan system.
The Credit Union National Association lists the average 30-year fixed conforming mortgage rate at
3.67% through credit unions, and 3.59% fixed through banks as of July 19. According to , the typical
national typical interest rate is 3.87% with43 points. If you're searching for a brand new mortgage
loan or to refinance your present loan, remember to ask about points and closing costs in addition to
the rate of interest. The conflict between stated Fed policy and marketplace behavior is creating
unpredictability in short-term movements of rates.