Interest Rate
Tue, Apr 15The interest rate represents the fee that a lender imposes on a borrower for the use of an asset, typically shown as a percentage of the borrowed amount.
This percentage generally indicates the annual payment (referred to as the annual percentage rate, or APR) but can also be applied to express payments made on a more or less frequent basis.
Interest rates can be classified as either simple or compound.
Simple interest is calculated solely on the original loan amount (known as the principal).
In contrast, compound interest is determined based on the principal plus any interest that has accumulated over the duration of the loan.
For example, if a $100 loan has a 10% compound interest rate, after one year, the interest would be 10% of $110 (the initial $100 plus $10 in accrued interest).
Most bank interest rates are influenced by the base rate established by their central bank.
The base rate is the interest rate at which commercial banks can borrow from their central bank.
Central banks utilize interest rates as a tool to manage inflation and consumer spending.
By increasing interest rates, the costs associated with borrowing rise, and the benefits of saving improve, which leads to a reduction in spending.
During economic downturns, many central banks will lower interest rates to stimulate increased spending.
Adjustments in the base rate can significantly impact markets, making them a critical event for traders.
Traders may also speculate on interest rate fluctuations through instruments such as bonds or derivatives.
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