How economic conditions affect interest rates and bond yields?

Question

example: existing economic conditions to forecast U.S and Canadian interest rates.

Answer 1

Interest rates depend on the demand and supply of loanable funds. However, in the short run, interest rates may also be affected by changes in Fed's monetary policy, etc.

The factors that influence interest rates are:

- real risk-free rate of interest

- expected rate of inflation

- risk premium

It is extremely difficult to estimate all of this, making interest rates extremely difficult to forecast with any degree of accuracy. Note that factors 1&2 comprise the risk-free rate. Thus, we can say that interest rates are composed of the risk-free rate plus a risk premium. The risk premium will differ among firms and securities within firms, whereas the risk-free rate should be the same for all firms at any given point in time.