INVESTMENT AND

INTEREST RATE
 An explanation of how the rate of
interest influences the level of
investment in the economy.
Typically, higher interest rates reduce
investment, because higher rates
increase the cost of borrowing and
require investment to have a higher
rate of return to be profitable.
Public Investments
• Securities that are traded on a public
stock exchange
• Required to issue a prospectus
• A prospectus is a detailed financial
disclosure document on the
company and its operations
• Stocks, Bonds, and Mutual Funds are
some popular examples
Private Investments
• Not publicly traded on a stock exchange
• Exempt from issuing a prospectus and require
less disclosure than public companies
• Real estate, private equity, infrastructure,
hedge funds, commodities, and venture capital
are popular types
• Traditionally been restricted to institutional and
accredited investors but with recent regulatory
changes private investing is becoming much
more accessible, affordable and streamlined
Interest is essentially a rental, or
leasing charge to the borrower, for
the use of an asset. In the case of a
large asset, like a vehicle or building,
the interest rate is sometimes known
as the lease rate. When the borrower
is a low-risk party, s/he will usually
be charged a low interest rate; if the
borrower is considered high risk, the
interest rate that they are charged
will be higher.
Interest rates are applied in numerous
situations where lending and borrowing is
concerned. Individuals borrow money to
purchase homes, fund projects, start
businesses, pay college tuition, etc. Businesses
take loans to fund capital projects and expand
their operations by purchasing fixed and long-
term assets such as land, buildings, machinery,
trucks, etc. The money that is lent has to be
repaid either in lump sum at some pre-
determined date or in monthly installments,
which is usually the case.
The money to be repaid is usually more than the
borrowed amount since lenders want to be
compensated for their loss of use of the money
during the period that the funds are loaned out; the
lender could have invested the funds instead of
lending them out. With lending a large asset, the
lender may have been able to generate income from
the asset should they have decided to use it
themselves. The difference between the total
repayment sum and the original loan is the interest
charged. The interest charged is an interest rate that
is applied on the principal amount.
LET’S TAKE AN
EXAMPLE
If an individual takes out a $300,000
mortgage from the bank and the loan
agreement stipulates that the interest rate
on the loan is 15%, this means that the
borrower will have to pay the bank the
original loan amount of $300,000 + (15% x
$300,000) = $300,000 + $45,000 = $345,000.
If a company secures a $1.5 million loan
from a lending institution that charges it
12%, the company must repay the principal
$1.5 million + (12% x $1.5 million) = $1.5
million + $180,000 = $1.68 million.
• Simple Interest Rate
• The examples presented above are calculated based on the
annual simple interest formula, which is:
• Simple Interest = Principal x Interest Rate x Time

• The individual that took out a mortgage will have to pay $45,000
in interest at the end of the year, assuming it was only a one-
year lending agreement. If the term of the loan was for 20 years,
the interest payment will be:
• Simple Interest = $300,000 x 15% x 20 = $900,000

• An annual interest rate of 15% translates into an annual interest

payment of $45,000. This means that after 20 years, the
borrower would have made $45,000 x 20yrs = $900,000 interest
payments. Now you get a sense of how banks make their money.