Business
Interest Rates in the UK
Interest rates in the UK refer to the cost of borrowing money or the return on savings and investments. They are set by the Bank of England's Monetary Policy Committee and influence business decisions by affecting the cost of capital and consumer spending. Changes in interest rates can impact the profitability of businesses, investment decisions, and overall economic activity.
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eBook - PDFFundamentals of Finance
Investments, Corporate Finance, and Financial Institutions
- Mustafa Akan, Arman Teksin Tevfik(Authors)
- 2020(Publication Date)
- De Gruyter(Publisher)
Interest the borrower pays to a bank is also the rent the borrower pays to the bank. Benchmark interest rates include the London 1nterbank Offered Rate (or LIBOR), which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. Interest rates often represent a benchmark rate for comparison with investment opportunities. Prime rate was a term applied in many countries to a reference interest rate used by banks. Some variable interest rates may be expressed as a percentage above or below the prime rate. As such, interest rates affect depository institutions (savings and loans), financial institutions (insurance companies and pension funds), financial markets (home mortgages), and securities markets (stocks and bonds). There are two major theories regarding interest rates: – The Loanable Funds Theory : Classical or Real Theory , which explains interest as determined by the demand for and supply of capital. 3 – Keynes ’ s Liquidity Preference Theory , which explains that the rate of interest is higher on securities with long-term maturities. Loanable Funds Theory Interest rates are affected by supply and demand of funds, as shown in Figure 2.1. The loanable funds theory suggests that interest rates are a function of the supply and demand for funds earmarked for loans. Savings may also have an effect on in-terest rates; the volume of saving depends on factors such as income, tax rates, and the demography of the population. Generally, interest rates rise during periods of prosperity, since people increase their level of consumption due to their increased 3 For more detailed information, see Peter Howells and Keith Bain, Financial Markets and Institutions , Fifth Edition, Pearson Education, 2007, pp.
eBook - PDFFinancial Institutions
Markets and Money
- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
This chapter explains the role of interest rates in the economy and provides a basic explanation of the fundamental determi- nants of interest rates. The chapter serves as a foundation for Chapters 5 and 6, which also deal with interest rates. ■ vectorfusionart/Shutterstock Even though we understand the factors that cause interest rates to change, only people who have a crystal ball can predict interest movements well enough to make consistent profits. The gutters of Wall Street are littered with failed interest rate prediction models. 4.1 WHAT ARE INTEREST RATES? For thousands of years, people have been lending goods to other people, and on occasion, they have asked for some compensation for this service. This compensation is called rent— the price of borrowing another person’s property. Similarly, money is often loaned, or rented, for its purchasing power. The rental price of money is called the interest rate and is usually expressed as an annual percentage of the amount of money borrowed. Thus, an interest rate is the price of borrowing money for the use of its purchasing power. To a person borrowing money, interest is the penalty paid for consuming income before it is earned. To a lender, interest is the reward for postponing current consumption until the maturity of the loan. During the life of a loan contract, borrowers typically make periodic interest payments to the lender. On maturity of the loan, the borrower repays the same amount of money borrowed (the principal) to the lender. Like other prices, interest rates serve an allocative function in our economy. They allocate funds between surplus spending units (SSUs) and deficit spending units (DSUs) and among financial markets. For SSUs, the higher the rate of interest, the greater the reward for postponing current consumption and the greater the amount of saving in the economy.
- Tan Chwee Huat, Kwan Kuen-Chor, Tan Chwee Huat, Kwan Kuen-Chor(Authors)
- 2014(Publication Date)
- Butterworth-Heinemann(Publisher)
Chapter 3 Interest Rates and Credit Mohamed Ariff 3.01 Introduction Financial institutions and markets discussed in the last chapter can be thought of as a loosely organized network for dealing with loanable funds in an economy. The loanable funds form the potential credits available to economic agents, namely, the firms, the government and the individuals. We turn our attention to understanding how interest rates determine the amount of loanable funds available as credits for economic activities. Interest rates may be thought of as the cost of borrowing the funds. Institutions provide a myriad of financial services such as lines of credit, term loans, negotiable certificates of deposits (NCDs), etc at a cost to creditors for making the funds available. Some organizations such as the companies listed in the organized exchanges and the government can issue financial instruments at stated or implied cost for having access to funds. This chapter attempts to describe this process by examining how the interest rates are determined in the market. An understanding of this process is very important to investors since interest rates will affect the outcomes of various investment activities of firms and individuals. 3.02 Interest Rates Business organizations and the government are the biggest borrowers of funds: the former require funds for undertaking real investments, and the latter for developing the economy and the social structure (education for example). Firms are faced with a number of profitable opportunities which will (1) extend the life of existing productive facilities and (2) offer new opportunities for investment which provide future benefits. These opportunities, let us call them investment schedules, are the objects of choice. Firms bid for funds in the market to undertake investments. Figure 3.1 illustrates the process of estimating the benefits of the investment schedules against the cost of getting these funds: management 39
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
This system is represented by interest rates, or the cost of money, which permits those borrowers who are willing to pay the rates that prevail in the financial markets to use funds provided by others. In this chapter, we describe basic concepts associated with interest rates, including factors that affect rates and methods for forecasting them. Yield 5 Total dollar return Beginning value 5 Dollar income 1 Capital gains Beginning value 5 Dollar income 1 sEnding value 2 Beginning valued Beginning value Equation 5.1 101 CHAPTER 5: The Cost of Money (Interest Rates) Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. consumption, (3) risk, and (4) inflation. To see how these factors influence an economy, imagine an isolated is- land community where the people survive by eating fish. They have a stock of fishing gear that permits them to live reasonably well, but they would like to have more fish. Now suppose Mr. Crusoe has a bright idea for a new type of fishnet that would enable him to increase his daily catch substantially. It would take him one year to perfect his design, build his net, and learn how to use it efficiently. Mr. Crusoe probably would starve be- fore he could put his new net into operation. Recogniz- ing this problem, he might suggest to Ms. Robinson, Mr. Friday, and several others that if they would give him one fish each day for one year, he would return two fish per day during all of the following year.
eBook - PDF- Robert Parrino, David S. Kidwell, Thomas Bates(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
The interest rate at which the supply of funds equals the demand for those funds is the equilibrium rate. The amount lender-savers want to lend (L) goes up as interest rates go up and lending becomes more profitable. Equilibrium rate of interest The equilibrium rate of interest ( r ) is the rate at which the desired level of lending (L) equals the desired level of borrowing (B). Equilibrium quantity of lending/ borrowing Interest rate (%) r L = B B L Quantity of lending/borrowing in the economy ($) The amount borrower-spenders want to borrow (B) goes down as interest rates go up and borrowing becomes more expensive. 2.7 The Determinants of Interest Rate Levels 53 Loan Contracts and Inflation The real rate of interest ignores inflation, but in the real world, price-level changes are a fact of life and they affect the value of a loan contract or, for that matter, any financial contract. For example, if prices rise (inflation) during the life of a loan contract, the purchasing power of the loaned amount decreases because the borrower repays the lender with inflated money – money that has less buying power. 9 To see the impact of inflation on a loan, we will look at an example. Suppose that you lend a friend €1 000 for one year at a 4 per cent interest rate. Furthermore, you plan to buy a new mountain bike for €1 040 in one year when you graduate from university. With the €40 of interest you earn (€1 000 × 0.04), you will have just enough money to buy the mountain bike. At the end of the year, you graduate and your friend pays off the loan, giving you €1 040. Unfortunately, the rate of infla-tion during the year was an unexpected 10 per cent and your mountain bike now will cost 10 per cent more, or €1 144 (€1 040 × 1.10). You have experienced a 10 per cent decrease in your purchasing power due to the unanticipated inflation. The loss of purchasing power is €104 (€1 144 − €1 040).
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