Unit 3 · Level 1 · Interest rates
Rates ripple everywhere
Change the price of money and you change the price of nearly everything built on it. Mortgages reprice, business projects get shelved, bond prices swing, stock valuations shift. Rates are the gravity of finance: invisible day to day, but everything bends around them.
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What you get asked
Match the rate move to its ripple.
Same lever, four directions. When money gets pricier, everything financed with money feels the squeeze.
Rates jump from 1% to 4%. What happens to payments on NEW mortgages?
On a €300,000 25-year loan, 1% → 4% raises the monthly payment by roughly €450. That's why housing markets cooled across Europe in 2022-23.
When market rates rise, the prices of existing bonds ___.
An old bond paying 1% looks pathetic next to new ones paying 4%, so its price drops until the yields match. Rates up, bond prices down. Always.
Why do higher rates cool down business investment?
A factory expected to return 6% is a green light when borrowing costs 2%, and a dud when it costs 7%. Rates are the hurdle every project must clear.
Why do stock markets often wobble when rates rise fast?
When 'boring' bonds pay 4-5%, risky stocks must offer more, and profits arriving years from now are worth less today. In 2022 that maths hit growth stocks hardest: the Nasdaq fell about 33%. 🐜
The rest of this unit
The price of money: how one number ripples through everything you own.