In this article, We learn about “Interest Rate “.Let’s Go!
Interest Rate is the amount a lender charges a borrower to lend money on an asset, usually expressed as a percentage of the amount borrowed.
The percentage usually refers to the amount paid each year (called the Annual Percentage Rate, or APR), but can be used to indicate more or less regular payments.
The interest rate can be Simple or Compound .
Simple interest is derived only from the original loan (called the principal).
Compound interest is calculated on the principal plus any interest accrued over the life of the loan.
So if a $100 loan has 10% compound interest, then after one year the interest will be 10% of $110 (the original $100 plus $10 of accrued interest).
Most bank interest rates are derived from the base rate set by the central bank
The benchmark interest rate is the interest rate at which commercial banks can borrow money from the central bank.
Central banks use interest rates to control inflation and spending.
By raising interest rates, both borrowing costs and savings earnings increase, resulting in less spending.
During a recession, many central banks will lower interest rates to encourage more spending.
Changes in base interest rates can have a significant impact on the market and are a big deal for traders.
Traders can also speculate on changes in interest rates through instruments such as bonds or derivatives.
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