Interest Rate

An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the interest rate (I/m) is a percent of principal (I) paid at some rate (m). For example, a small company borrows capital from a bank to buy new assets for its business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are normally expressed as a percentage of the principal for a period of one year.

Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks or reserve banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. This happened in Japan in the late 1980s and early 1990s, resulting in the large unpaid debts to the Japanese banks and the bankruptcy of these banks and causing stagflation in the Japanese economy (Japan being the world's second largest economy at the time), with exports becoming the last pillar for the growth of the Japanese economy throughout the rest of 1990s and early 2000s. The same scenario resulted from the United States' lowering of interest rate since late 1990s to the present (see 2007–2012 global financial crisis) substantially by the decision of the Federal Reserve System. Under Margaret Thatcher, the United Kingdom's economy maintained stable growth by not allowing the Bank of England to reduce interest rates. In developed economies, interest-rate adjustments are thus made to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum.

Read more about Interest Rate:  Historical Interest Rates, Reasons For Interest Rate Change, Real Vs Nominal Interest Rates, Market Interest Rates, Impact On Savings and Pensions, Mathematical Note, Negative Interest Rates

Other articles related to "interest rate, rate, interest, interest rates, rates":

Loanable Funds - Interest Rate
... The interest rate is the cost of borrowing or demanding loanable funds and is the amount of money paid for the use of a dollar for a year ... The interest rate can also describe the rate of return from supplying or lending loanable funds ... It is typically measured as an annual percentage rate ...
Loan Modification In The United States - Fannie Mae/Freddie Mac Plan
... changes in terms may include one or more of the following Adding the accrued interest, escrow advances and costs to the principal balance of the loan, if allowed by state law Extending the length of the mortgage ... If the new rate is set below the market interest rate, after five years it will step up in annual increments to either the original loan interest rate or the market interest rate at the time of the modification ...
Loan Modification In The United States - IndyMAC Plan
... Capitalize delinquent interest and escrow ... Reduce interest rate to as low as 3 percent ... Cap the interest rate at the Freddie Mac Weekly Survey rate effective as required to meet the target HTI ratio, fixing the adjusted rate and monthly payment ...
List Of Quantitative Analysts - Pioneers
... Brennan, co-designed the Brennan-Schwartz interest rate model, and pioneer of real options theory ... Thomas Ho, author of the Ho–Lee model and key rate duration ... framework for pricing interest rate derivatives ...
Negative Interest Rates
... Nominal interest rates are normally positive, but not always ... a loss, and a bank offering a negative deposit rate will find few takers, as savers will instead hold cash ... However, central bank rates can, in fact, be negative in July 2009 Sweden's Riksbank was the first central bank to use negative interest rates, lowering its ...

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