Assignment Sample on U25292 Economics Coursework
BRIEFLY EXPLAIN WHAT IS MEANT BY THE RATE OF INTEREST. HOW IS THE RATE OF INTEREST DETERMINED?
Rate of interest is the amount that is charged to gain any borrowings and it is calculated annually. Companies borrow money to pay the long and short term outstanding from banks or other financial organizations. Investors get a fixed rate of interest in giving a loan on a simple interest rate.
Definition of the interest rate
Creditors have to pay to the lenders a certain amount of money yearly based on the contract of borrowing and the percentage of this annual payable is called interest. A percentage that is calculated annually that is charged by lenders for taking loans from them. As cited by Parking, Powell & Matthewes (2017), interest rate refers to the percentage that is charged by bank or other financial authorities for providing a certain amount of money to an individual or a company. Long term interest rates are comparatively lower than short term loans as example the interest rate of credit cards is much higher than home loans. As opined by Wynne & Zhang (2018), banks allow bank overdraft policy to their account holders based on their credit score and charge interest against it. Interest rate is calculated annually on the given loan or borrowings and the creditor is liable to pay it to the lender.
Determination of the interest rate
Interest rates are two types, one is simple interest rate and other one is compound interest. Principal is fixed in a simple interest rate system and annual interest is the same every year. As cited by Case (2016), compound interest changes every year and principle is calculated on the current value of borrowing in this method. Financial institutions provide loans to companies and charge annual interest on their due, it helps to fulfill companies’ sudden requirement of money. Interest rate is charged on credit cards for not paying short term dues on time.
Unsecured loan charges interest and companies mortgage their property and get loans against a fixed interest rate to pay sudden requirements of the company. These are the interest that is charged by lenders and banks. As cited by Negro et al. (2017), banks and different financial institutions open savings accounts and funds to collect money from the public for further investment and pay an interest to these accounts. Banks pay interest on their account holders and charge interest from borrowers. Companies take loans based on the lowest rate of interest and people take home loans by paying a certain amount of interest.
As per the study it can be concluded that interest is necessary for any types of credit transaction between companies and individuals. Interest rates are two types: simple interest and compound interest. Financial institutions provide short term and long term loans to the consumers to finance teams in tough times. Rate of interest is the estimated cost that the receiver of money on borrowing is liable to pay the lender. Interest rate is high in short term loans and rate of interest is comparatively lower in long term loans.
Case, k. (2016) principle of Economics (12th ed) pearson. Retrieved from: https://www.pearson.com/us/higher-education/program/Case-Principles-of-Economics-Plus-My-Lab-Economics-with-Pearson-e-Text-2-semester-access-Access-Card-Package-12th-Edition/PGM2547878.html
Del Negro, M., Giannone, D., Giannoni, M. P., & Tambalotti, A. (2017). Safety, liquidity, and the natural rate of interest. Brookings Papers on Economic Activity, 2017(1), 235-316. Retrieved form: https: //muse.jhu.edu/article/671750/summary
Parking, M., Powell, M., & Matthewes, K. (2017) Economics (10th ed). Retrieved from: https://www.pearson.com/uk/educators/higher-education-educators/program/Parkin-Economics-European-Edition-10th-Edition/PGM1264841.html
Wynne, M. A., & Zhang, R. (2018). Estimating the natural rate of interest in an open economy. Empirical Economics, 55(3), 1291-1318. Retrieved form: https: //link.springer.com/article/10.1007/s00181-017-1315-5
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