Economics
Interest Rate Meaning
An interest rate is the cost of borrowing money or the return on investment, expressed as a percentage. It is a key tool used by central banks to regulate the economy, influencing borrowing, saving, and spending. Changes in interest rates can impact inflation, employment, and overall economic growth.
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7 Key excerpts on "Interest Rate Meaning"
eBook - ePubMoney and Banking
An International Text
- Robert Eyler(Author)
- 2009(Publication Date)
- Routledge(Publisher)
2 Interest rates and financial marketsIntroduction
Interest rates represent prices of every economic action because they represent both opportunity costs for the use of goods, services and inputs and connect time periods to each other. The sacrifice of consumption today must come with a reward, and consuming today must have its cost. There are many interest rates, one for every asset that exists. The “price” of an asset is in part determined by an interest rate. Interest rates are used in business plans to discount the future, as income to those who have deposited money, purchased stocks and bonds, and to those who make a loan. It is a cost to those who borrow, the cost of consuming more than you can afford at a given time. It is also the cost of not buying something that could produce income. We can summarize the interest rate’s definition generally in four ways:• The revenue from lending or not consuming; • The cost of borrowing or consuming; • The opportunity cost of holding money as cash; and • A measure of time preference concerning consumption.Interest rates come in many forms, all with the same basic set-up. An interest rate includes measures of risk, both general and very specific. When you borrow money, the rate at which you borrow is the nominal rate. This rate is the stated interest cost or return of a financial investment. There is also a real rate, but what separates the two? The difference between nominal and real variables in economics has to do initially with inflation, or purchasing power erosion, and other risks. In its most basic form, a nominal interest rate has the following equation:R = r + P(2.1) where R is a nominal rate, r is the associated real rate and P
eBook - PDF- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2016(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.
eBook - PDFMoney and Calculation
Economic and Sociological Perspectives
- M. Amato, L. Doria, L. Fantacci, M. Amato, L. Doria, L. Fantacci(Authors)
- 2010(Publication Date)
- Palgrave Macmillan(Publisher)
The points briefly outlined above will be developed in the following sections. I The rate of interest is the price of money. More precisely, it is the price paid for the use of money for a certain time. In still other terms, it is the price paid for the anticipation of a sum of money. Like all other prices, it is traditionally represented by economic theory as the point of intersection between a supply and a demand, where the demand is expressed by those who need the money to finance an economic activ- ity, and who expect to pay the interest from the proceeds of that activ- ity, and the supply is provided by those who have accumulated money, by refraining from expenditure. Like all market prices, the interest rate is assumed to settle at a level where demand equals supply, so as to clear the market. Following this line of reasoning, the classical theory described the market rate of interest as the clearing price for savings and investments. According to this theory, the rate of interest appeared as a remunera- tion for the thrift of the savers, paid by the proceeds of the activities, innovations and progress that were made possible by the anticipation of money to the investors. It was on this basis that, following Locke (1692) and Bentham (1787), the classical economists advocated a liberalization of interest on loans. This was seen as the best way to ensure an adequate incentive for the activity of saving, as a source of finance for economic growth and development. The idea, gradually disseminating common thought and practice, was eventually erected into an economic princi- ple that appeared to reconcile personal and collective interests. Saving, Calculation Implied in the Money Rate of Interest 83 no longer identified with the hideous vice of avarice, became a virtue, public and private; and interest, once banned under the infamous name of usury, became its legitimate reward.
eBook - PDFFundamentals of Finance
Investments, Corporate Finance, and Financial Institutions
- Mustafa Akan, Arman Teksin Tevfik(Authors)
- 2020(Publication Date)
- De Gruyter(Publisher)
Money supply has various definitions as M1, M2, and M3. Economists believe that the money supply is important in managing economic activity. The interest rate is the cost of money. For banks, interest is paid on savings de-posits; to consumers, interest is paid on loans and credit card balances. Interest can also be defined as the cost of postponing consumption. The nominal interest rate (NIR) is subject to risks of inflation, maturity, default, and liquidity. The yield curve plots yield against time to maturity for default-free securities. 6 For a complete discussion of bank regulation, see S. Dow, “ Why the banking system should be Regulated, ” Economic Journal , 106(436), 1996, pp. 698 – 707. 2.11 Summary 29 The Central Bank in general is a government-established organization responsi-ble for supervising and regulating the banking system and for creating and regulat-ing the money supply. The balance sheet of a Central Bank is an important economic indicator followed by markets. The banking industry is heavily regulated to inform investors properly, insure soundness of financial intermediaries, and improve monetary control. 30 2 Money and Interest Rates
eBook - ePub- F. A. Hayek, Lawrence H. White(Authors)
- 2011(Publication Date)
- University of Chicago Press(Publisher)
It is not a price paid for any particular thing, but a rate of differences between prices which pervades the whole price structure. Insofar as the money rate of interest is concerned, our rate of interest is merely one of the factors which helps to determine it, and is the phenomenon most nearly corresponding to it which we can find in our imaginary moneyless economy. But if it were not for the well-established usage, it would probably have been better to refer to this ‘real’ phenomenon either, as the English classical economists did, as the rate of profit, or by some such term as the German Urzins. 1 Limited Scope of Present Discussion of Money Rate of Interest Although a full discussion of the monetary problems to which the existence of the ‘real’ rate of interest gives rise lies outside the scope of the present book, it would hardly be appropriate to leave our subject without giving a somewhat more definite indication of how the rate of interest we have been discussing and the money rate of interest are related. At this point we can give no more than an outline of the answers to the main problems. A full discussion of the whole complex of problems involved would require another book of about the same size as this one—even supposing that, in the present state of our knowledge, any such systematic and exhaustive treatment of these as yet imperfectly explored problems could be attempted successfully. As has been explained earlier in this volume, its task is to lay the foundations for the treatment of these problems, not to discuss them in any detail. And we shall confine ourselves in this final Part to the task of showing how these theoretical foundations can be used for the elucidation of certain salient points in the discussion of these more complex problems
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
115 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. 3. When the U.S. economy shows signs of expanding too quickly, the Fed normally takes actions to increase interest rates to discourage too much expansion and to control future growth so that it does not result in high inflation. 4. During recessions, short-term rates decline more sharply than do long-term rates. This situation occurs for two reasons. First, the Fed operates mainly in the short-term sector, so its intervention has the strongest effect here. Second, long-term rates reflect the average expected inflation rate over the next 20 to 30 years. This expecta- tion generally does not change much, even when the current rate of inflation is low because of a recession. 5-5 INTEREST RATE LEVELS AND STOCK PRICES Interest rates have two effects on corporate profits. First, because interest is a cost, the higher the rate of inter- est, the lower a firm’s profits, other things held constant. Second, interest rates affect the level of economic activity, and economic activity affects corporate profits. Interest rates obviously affect stock prices because of their effects on profits. Perhaps even more important, they influence stock prices because of competition in the marketplace between stocks and bonds. If interest rates rise sharply, investors can obtain higher returns in the bond market, which induces them to sell stocks and transfer funds from the stock market to the bond market.
Available until 4 Dec |Learn more- Jagdish Handa(Author)
- 2002(Publication Date)
- Routledge(Publisher)
part sevenTHE RATES OF INTEREST IN THE ECONOMY
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chaptertwentyTHE MACROECONOMIC THEORY OF THE RATE OF INTERESTThe rate of interest is one of the endogenous variables in the Keynesian and classical models, so that its analysis is properly conducted as part of a complete version of those models. These were presented in Chapters 13 and 14.This chapter singles out the competing views on the determination of the rate of interest and focuses on their differences and validity. It also highlights the very important difference between the comparative static and the dynamic determination of the rate of interest.key concepts introduced in this chapter
• The Fisher equation of the nominal rate of interest• Stocks versus flows of funds• The loanable funds theory• The liquidity preference theory• The excess demand function for bonds• The dynamics of interest rate determination• The neutrality of money and inflation for the real rate of interestMacroeconomics avoids the bewildering array of interest rates on the numerous assets in the market by focusing on one single rate of interest, without completely specifying which rate of interest it is, as for example in the IS-LM model of Chapters 13 and 14
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