MACASINAG, BRYAN IVANN S.

BSMA-4B

FM 321- 13840 9/24/2021

Determinants of Interest Rates

BANK LOAN PRINCIPAL

Determined by INTEREST PRINCIPAL

PAYS BACK

INTEREST RATE

The interest rate is defined as the proportion of an amount loaned which a lender

charges as interest to the borrower, normally expressed as an annual percentage. It is

the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers

for keeping money in an account. An interest rate is the percentage of principal charged by the

lender for the use of its money. The principal is the amount of money loaned. Interest

rates affect the cost of loans. As a result, they can speed up or slow down the economy.

Interest rates are one of the most important aspects of the American economic system.

They influence the cost of borrowing, the return on savings, and are an important component of

the total return of many investments. Moreover, certain interest rates provide insight into future

economic and financial market activity.

 Supply and demand are one of the determinants of Market Interest rate levels are a

factor of the supply and demand of credit: an increase in the demand for money or credit will

raise interest rates, while a decrease in the demand for credit will decrease them. Conversely,

an increase in the supply of credit will reduce interest rates while a decrease in the supply of

credit will increase them. Inflation will also affect interest rate levels. The higher the inflation

rate, the more interest rates are likely to rise. This occurs because lenders will demand higher

interest rates as compensation for the decrease in purchasing power of the money they are paid

in the future. The government has a say in how interest rates are affected. Also, The

government has a say in how interest rates are affected. The payment of interest may easily

result in a transfer of purchasing power to higher income groups, contrary to accepted

standards of equity. As well as causing more and more of the government's resources to be

used to pay interest on its debt, a large public debt can push interest rates up for other

borrowers.

Interest rate risk is the potential for investment losses that result from a change

in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-income

investment will decline. The change in a bond's price given a change in interest rates is known

as its duration. Interest rate risk arises from swinging interest rates in bond markets. The more

your company has floating rate debt, the greater is the risk associated with a rise in interest

rates. Products or services whose prices depend on interest rates may also expose

your company to interest rate risk.

According to the quantity theory of money, a growing money supply increases inflation.

Thus, low interest rates tend to result in more inflation. High interest rates tend to lower inflation.

Inflation will also affect interest rate levels. The higher the inflation rate, the more interest

rates are likely to rise. This occurs because lenders will demand higher interest rates as

compensation for the decrease in purchasing power of the money they are paid in the future.