ISBN 9789382560678,Interest Rate; Its Structure, Theories, Policies & Decisions

Interest Rate; Its Structure, Theories, Policies & Decisions



Indra Publishing House

Publication Year 2014

ISBN 9789382560678

ISBN-10 938256067X


Number of Pages 352 Pages
Language (English)

Business & management

In economic theory, interest is the price paid for inducing those with money to save it rather than spend it, and to invest in long-term assets rather than hold cash. Rates reflect the interaction between the supply of savings and the demand for capital; or between the demand for and the supply of money. Rates of interest can be expressed as a percentage payable (a "coupon"), usually per annum; or as the present "discounted" value of a sum payable at some future date (the date of "maturity"). Theories of interest rates are also very important in economics because these theories play an important role in explaining the psyche of people and people's motives to hold or release the cash. This liquidity preference of people is very important in deciding the rate of interest via Money Supply in economy. Inflationary expectations, however, are one of the most important determinants of interest rates. Broadly, savers demand a real return from their investments. Changes in the forecasts of future inflation are therefore reflected in the current prices of assets. The effect on bonds of varying maturity, for example, can be charted as shifts in the "yield curve". Rates of interest also reflect varying degrees of risk. A body with a rock-solid credit-rating, like the State Bank of India will be able to attract savings at very much lower rates of interest than corporate issuers of "junk bonds". Countries with high levels of existing debt may have to pay higher rates on government borrowing than countries where the risk of default is less. In any economy there will therefore be a multiplicity of interest rates, reflecting varying expectations and risks.