Loanable Funds Theory
Business Demand for Loanable Funds
l There is an inverse relationship between interest rates and the quantity of loanable funds demanded
n Demand = borrowers, issuers of securities, deficit spending unit
n Supply = lenders, financial investors, buyers of securities, surplus spending unit
n Explains how economic and other factors influence interest rate changes
n Interest rates determined by demand and supply for loanable funds
Loanable Funds Theory, cont.
Net Present Value is calculated as follows:
n
NPV =
–INV +
t= 1
CFt (1 + k)t
Loanable Funds Theory
Business Demand for Loanable Funds
l Projects with a positive NPV are accepted because the present value of their benefits outweighs their costs