Interest Rate
Explanation: An interest rate is the amount a lender charges a borrower for the use of assets, expressed as a percentage of the principal. It is typically noted on an annual basis, known as the annual percentage rate (APR). Interest rates are fundamental to the economy as they influence borrowing, spending, and inflation.
Example: If a bank offers a loan of $10,000 at an annual interest rate of 5%, the borrower will pay $500 in interest each year, assuming simple interest. If it’s compound interest, the amount will vary depending on the compounding frequency.
Reference Link: For more information on interest rates, visit Investopedia’s Interest Rate.
FAQs:
- How are interest rates determined?
- Interest rates are influenced by central bank policies, economic conditions, and the supply and demand for credit.
- What is the difference between fixed and variable interest rates?
- Fixed rates remain constant over the loan term, while variable rates can fluctuate based on changes in a benchmark interest rate.
- How do interest rates affect the economy?
- Higher rates can slow borrowing and spending, reducing inflation, while lower rates can stimulate borrowing and spending, promoting economic growth.
- What is the impact of interest rates on investments?
- Interest rates can affect bond prices, stock market performance, and the overall cost of borrowing and investing.
- Why do central banks change interest rates?
- To control inflation, manage economic growth, and stabilize the currency.