Bank Interest Rates
Bank interest rates refer to the percentage charged or paid by a financial institution on funds held by customers. These rates impact borrowing and saving costs for individuals and businesses, influencing spending and investment decisions. Central banks often use interest rates as a tool to control inflation and stimulate economic growth.
7 Key excerpts on "Bank Interest Rates"
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What is Interest Rate? Interest rates are the levels at which interest is charged a borrower for using money that they obtain in the form of a loan from a bank or other lender. These are also the rates that individuals and businesses are paid for depositing their funds with a bank. Interest rates are central to the running of capitalist economies. They are commonly written out as percentage rates for a given time frame, most commonly per year. As an example, a small business might require capital to purchase new assets for the company. To acquire these, they borrow money form a bank. In exchange for making them this loan, the bank is paid interest at a pre set and agreed upon rate of interest for lending it to the company and putting off their own use of the monies. They receive this interest in monthly payments along with repayments of the principal. Interest rates are also used by government agencies in pursuing monetary policies. Central banks set them to influence their nation’s economic performance. They impact many elements of an economy such as unemployment, inflation, and investment levels. There are several different interest rates to consider. The most commonly expressed one is the nominal interest rate. This nominal interest rate proves to be the amount of interest that is payable in money terms. If a family deposits $1,000 in a bank for a year, and is paid $50 in interest, then their balance by the conclusion of the year will be $1,050. This would translate to a nominal interest rate amounting to five percent per year. The real interest rate is another type of rate used to determine how much purchasing power is received. It is the interest rate after the level of inflation is subtracted. Determining the real interest rate is a matter of calculating the nominal rate and removing the amount of inflation from it. In the example above, supposed the economy’s inflation level is measured at five percent for the year...
eBook - ePubMoney and Banking
An International Text
- Robert Eyler(Author)
- 2009(Publication Date)
- Routledge(Publisher)
...This relationship between the quantity of cash or liquidity demanded and the interest rate is of key importance to a great deal of macroeconomic theories but also to monetary and fiscal policy in practice. The way consumers react to changes in interest rates paid on their cash holdings changes the demand for goods and services, as well as the demand for lending. However, for now the idea is simple: the interest rate is the opportunity cost of holding money in your wallet rather than in an interest-bearing account or investment. Measure of time preference It is this definition that links the three above and binds them in the household’s eyes. When you chose to consume more than your income, or consume with credit rather than paying in full, you are making a choice about your time preference to consume. The interest rate is a measure of how people prefer to consume with respect to time: if the interest rate falls, there will be marginal changes in consumption based on a smaller cost of credit. Certain households which initially would save, say $1000, now spend $100 of that $1000 and save only $900. They still save a certain amount, but it is less. The lower interest rate has triggered an incentive for them to spend on credit, or prefer to spend now than later in time. The cost of borrowing falls in the previous example, providing an incentive to borrow. Certain lenders must provide the loan, thus they see the interest rate as the revenue from lending, and want to take advantage of it. Finally, the borrower must demand cash in order to spend, thus the cost of holding money must also be going down at the same time, and intuitively it does. The interest rate is all four of these ideas simultaneously, and must be for financial markets to work correctly...
eBook - ePubForeign Exchange
A Practical Guide to the FX Markets
- Tim Weithers(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...CHAPTER 3 Interest Rates WHAT ARE “INTEREST RATES”? An interest rate is the price of money. Economists may talk about interest as the reward that accrues to foregone consumption, which could be argued, I suppose, at some level, but, in the end, the interest rate is simply the cost of borrowing money or the return from investing or depositing money. The nice thing about defining the interest rate as the price of money is that you don’t have to specify whether it is a rate for borrowing (a cost) or a rate for lending (a benefit), though, as with every price in the financial markets, you should be prepared to encounter a bid-ask spread in the world of interest rates as well. In Chapter 2, we defined every price as a ratio of quantities. When I think of an interest rate, I usually think in terms of percentages. For example, we might say that the interest rate is 5.20%. Where does the notion of price as a ratio come into play here? Let’s say you wanted to host a party for a group of your friends celebrating the recent successes of your favorite sports team. If you wanted to serve food and beverages, you’d need to spend some money. If you did not have any cash readily available, you could, in principle, go to the bank and borrow some money. The banker would ask you how much money you’d like, would check your credit rating, would ask you to fill out and sign several forms, and then would ultimately quote you a rate of interest, say, 5.20%. If you decide to borrow USD 100 today, then in one year’s time you would be obliged to pay back USD 105.20. That ratio, USD 105.20/USD 100, reflects the interest rate. You would have to pay back the money you borrowed (the USD 100) as well as the interest on that money (the additional USD 5.20). Though it may sound odd, the price of USD 100 today is USD 105.20 in one year. What if you only needed to borrow the money for a week (until your next paycheck)? The banker would still quote you a rate of interest like 5.20%...
eBook - ePubBank Investing
A Practitioner's Field Guide
- Suhail Chandy, Weison Ding(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
...CHAPTER 7 Role of the Central Bank and Interest Rates “Interest rates are to asset prices what gravity is to the apple. When interest rates are low there is little gravitational pull on asset prices. Interest rates power everything in the economic universe.” – Warren Buffett at the Berkshire Hathaway Annual Meeting May 4, 2013 ROLE OF THE CENTRAL BANK The Federal Reserve is the central bank of the United States. Though its existence feels perennial, it is actually the third central banking system implemented in the United States, preceded by the aptly named First Bank of the United States (1791–1811) and the Second Bank of the United States (1817–1836), as well as a rather messy period that involved a network of national banks. Founded by Congress in 1913 following a secretive meeting on Jekyll Island between members of the government and some of the most important bankers of the time, the Federal Reserve is the monetary authority that manages the currency, money supply, and interest rates in the United States, and serves as a primary regulator in the banking industry. The Federal Reserve is comprised of two main entities (Exhibit 7.1): a central authority known as The Board of Governors, based in Washington, D.C., and a network of 12 Federal Reserve Banks with different geographical domains – Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. These districts were set up many years ago, and thus reflected the economic and demographic realities of the time. There are endless books and opinion pieces on the wisdom of an autonomous and rather opaque institution that wields so much power; however, this chapter will not focus on that...
- Knut Wicksell(Author)
- 2011(Publication Date)
- Josephs Press(Publisher)
...For neither an individual bank nor the banks of an individual country can on their own initiative embark on any change without keeping in accord with the procedure adopted by other banks. The open market may perhaps seem to present a somewhat more lively picture, but it is practically certain that the lending rate of interest never follows directly on movements of the natural rate, and usually follows them only very slowly and with considerable hesitation. During the period of transition, the deviation between the two rates has full play, resulting in that phenomenon, often referred to above, which on a superficial view appears to contradict our theory but in reality is in complete accordance with it: prices rise when the rate of interest (the capital rate and consequently the money rate) is high and rising, and in the contrary case they fall. This brings us to a consideration which has for a long time been emphasised by various writers. When the rate of interest (both the capital and the money rate) is high, there is an obvious tendency for money to circulate somewhat more rapidly, for “hoards” of coin and bullion to be drawn out of their hiding-places, and for the employment of all credit instruments to become more profitable—in short, there is a tendency for prices to rise (though only once and for all, not progressively). A low rate of interest has in all respects the opposite tendency: certain kinds of credit instrument can no longer be used at all, because such payments as the stamp duty on bills and the tax on notes would absorb too substantial a part of the interest: other things being equal, prices stand at a lower level. In its essence this is merely a special case of our general proposition. For it is only so long as these various factors maintain the money rate of interest either above or below the appropriate level of the natural rate that prices will continue moving in the one direction or the other...
eBook - ePub- W. Charles Sawyer, Richard L. Sprinkle(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...In the case of an interest-bearing checking account, it does not earn as much interest income as one can earn on bonds or non-checkable deposits. 6 In most cases, real GDP would be a useful proxy for the real level of economic activity. 7 In more general terms, the central bank may adjust the rate of growth of the money supply that affects interest rates. It is rare for the money supply to actually decline for any extended period of time. A decrease in the money supply is in most cases really a slowdown in the rate of growth of the money supply relative to the rate of growth in the demand for money. 8 We are consciously avoiding the issue of what the central bank’s target is. Whether or not the target is the interest rate or the money supply is not important in the current context. Changes in the money supply will affect interest rates and this in turn will have an effect on the exchange rate. 9 In simple terms, cash flow is total cash revenues minus total cash costs. In reality, the term is considerably more complex. For a more thorough treatment of cash flow, see Brigham and Gapenski (1997). 10 All interest rates and exchange rate changes are in per annum terms. 11 Appendix 15.2 presents a brief mathematical formulation of interest parity. 12 We have assumed that the inflation rate or the price level in the U.S. remains constant. We allow for changes in the price level as a result of changes in the money supply in Chapter 16. 13 The original work on overshooting can be found in Dornbusch (1976). REFERENCES Brigham, Eugene F. and Louis C. Gapenski. 1997. Intermediate Financial Management. Orlando, FL: The Dryden Press. Central Bank News 2019. http://www.centralbanknews.info/p/about-us.html Dornbusch, Rudiger. 1976...
- Hassanali Mehran, Marc Quintyn, and Bernard Laurens(Authors)
- 1996(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
...However, financial institutions and instruments have become diversified and the financial market is now well developed. Interest rates in real terms for deposits with a maturity of one year, which play a major role in China’s economy, were at times negative. However, individuals have rapidly increased their savings, and the ratio of savings to GDP has remained high. Thus, some people question the impact of interest rates, whether market-determined or not, on Chinese individual saving. One is hesitant to agree with this opinion. The axiom that savings are elastic to interest rates is undoubtedly correct. The above-mentioned phenomenon of reduced elasticity of interest rates on savings in China may only reflect the impact of other factors on savings, since the increase in savings is not determined only by the level of interest rates. Savings are a function of interest rates, all other things being equal. We should not deny the necessity of liberalizing interest rates simply because other factors also influence saving. What is happening in China is due to the following specific factors. 1. Before 1980, the monetary income per capita was very low. Then per capita income increased rapidly, which accelerated the growth of savings. In other words, the impact of the increase in income on the growth of savings was greater than the impact of interest rates. 2. With the low savings per capita, interest earnings accounted for a small proportion of total incomes. As a consequence, the desire to earn interest income was not the main goal for the depositors. Before 1991, individual savings in rural areas averaged Y 2,200 per capita, and individual savings in rural areas averaged Y 277 per capita. Thus, income generated by interest earnings was very low, as was depositors’ sensitivity to the level of interest rates. However, in recent years, individual savings per capita have increased substantially...
