San Jose, Ivan Raphael

RECINAN - Module 3 HW

1. What are the factors that influence the reason why interest rates goes up and down;
and explain what are these factors and how they influence interest rates.
- Supply and demand of credit- An increase in the demand for money or credit
raises interest rates, while a decrease in demand lowers them.
- Government borrowing- When the government borrows more, it increases the
demand for credit and raises interest rates.
- Inflation- High inflation erodes the purchasing power of money, causing
lenders to demand higher interest rates to compensate for the loss.
- Central Bank's monetary policy objectives- The actions taken by the Central
Bank to control inflation and stabilize the economy can impact interest rates.

2. How do interest rates affect the economy?

Interest rates affect the economy in several ways:
- Investment returns: Higher interest rates can reduce the attractiveness of
investments, as borrowing costs increase, potentially leading to a decrease in
investment activity.
- Loan repayment costs: Higher interest rates can make borrowing more
expensive, increasing the cost of loans for businesses and individuals, which
can impact spending and investment decisions.
- Savings and consumption: Higher interest rates can encourage saving rather
than spending, as the returns on savings increase, leading to reduced
consumption and potentially slowing down economic growth.
- Currency exchange rates: Interest rate differentials between countries can
influence currency exchange rates, impacting international trade and
investment flows.

3. How are banks classified? Explain the difference of each bank classification.
Banks are classified into different categories based on their functions and ownership:
- Commercial banks: These banks provide a wide range of financial services to
individuals and businesses, including accepting deposits, lending, and
offering various banking products.
- Investment banks: These banks specialize in providing financial services to
corporations, governments, and institutional clients. They assist in raising
capital through issuing securities, underwriting, and mergers and acquisitions.
- Central banks: These are the apex monetary authorities responsible for
formulating and implementing monetary policies, regulating the banking
system, and maintaining financial stability.

4. What is amortization?
Amortization refers to the process of gradually paying off a debt over a
specific period through regular payments that include both principal and interest. It
ensures that the loan is fully repaid by the end of the term.
 5. What is negative amortization?
Negative amortization occurs when the borrower's payments are not sufficient
to cover the interest due on the loan. As a result, the unpaid interest is added to the
loan balance, increasing the overall debt.

6. Name other payments not included in the amortization that a borrower pays.
In addition to the principal and interest, borrowers may also need to pay other
expenses not included in the amortization. These may include property taxes,
insurance premiums, and fees for services like appraisals and inspections.

References:

Heakal, R. (n.d.). What are the forces behind interest rates and what causes them to rise?.
Investopedia. https://www.investopedia.com/insights/forces-behind-interest-rates/

Explainer: Six factors that influence interest rates in an economy. Moneycontrol. (2019,
February 18).
https://www.moneycontrol.com/news/business/personal-finance/explainer-six-factors-that-infl
uence-interest-rates-in-an-economy-3549621.html

Tamplin, T. (2023, June 9). Interest rate: Definition, calculation, & factors that affect it.
Finance Strategists. https://www.financestrategists.com/banking/interest-rate/