Why Interest Rates Are Climbing

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-meeting policy statement at 12:30 P.M. eastern time after the
Federal Open Market Committee (FOMC) completed its two-day assembly. Ahead of the Federal
Reserve's statement, government-sponsored Freddie Mac announced fixed mortgage rates held
steady as the financial markets speculated there would be additional stimulus. As part of so called
QE2, the Fed reinvested in securities purchased during QE1 and purchased $600 billion in long-term
Treasury securities. Nevertheless, Misra said the markets happen to be acting as though its two do
not consider the Fed.
Torralba said QE2 lowered long term interest rates by less than the initial round of quantitative
easing, which began in late 2008, in the height of the fiscal disaster. The yield to maturity
computation comprises the bond's present market price, par value, coupon interest rate and time to
maturity. Among the simplest approaches to see this concept in action is really to look at the value 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 that the bond does not distribute interest payments during the lifetime of
the bond. The majority of 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 highest rate of return for each unit of risk they take on. If current interest
rates were to increase to 5 percent, then having a zero-coupon bond that is simply yielding 3 percent
becomes less alluring. A different way to see this relationship in action would be to add on a coupon
(interest) rate. According to the Federal Reserve, the average 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 seems great to Matt, so he decides to choose the bond Amy
determines to hold off, because she thinks that interest rates will rise in the the next couple of
weeks, as well as for this particular example, she's right. You can get an entire chart 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 wanted to market his bond, his could
sell at a premium or above par value. This really is simply another way to exemplify the inverse
relationships between interest rates and bond prices, and remind you to think about the ups and
downs before jumping to the bond market. In case you have federal student loans or plan on using
the to fund your education, understand that you can't shop around for rates since they're set under
the national Direct Loan program.
The Credit Union National Association lists the typical 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
common national average interest rate is 3.87% with43 points. If you're buying a brand new home
loan or to refinance your current loan, make sure to ask about points and closing prices as well as
the rate of interest. The disagreement between stated Fed policy and marketplace behavior is
creating volatility in short-term movements of rates.