ABSTRACT
This chapter examines the factors that determine the money market or short-term interest rate. It deals with the capital market and the factors that determine the capital market or long-term interest rate. The chapter explores the circumstances in which this situation occurs. A rise in the interest rate could cause sales to decrease, or costs to increase, causing a lowering of profits. The risk of interest rate fluctuations having an effect on the future profits of a company is called the interest rate risk. Businesses invest in production resources such as buildings and machines. The main function of the financial markets is to bring together the deficits and surpluses of liquid assets within an economy. The residual maturity of the financial asset is used as a criterion for dividing the market into the money market and the capital market. Financial assets with a residual maturity of less than two years are traded on the money market.
