The interest rate is the amount of interest payable per period, as a proportion of the amount lent, deposited or borrowed (called the principal amount). The total interest on the loan or loan amount depends on the principal amount, the interest rate, the frequency of compounding, and the length of time lent, stored or borrowed.
This is defined as the proportion of the loan amount lent by the lender as interest to the borrower, usually expressed as an annual percentage. This is the rate that the bank or lender charges for borrowing the money, or the bank rate pays its savers to keep the money in the account.
Annual interest rates are rates for one year. Other interest rates apply for different periods, such as a month or day, but usually annually.
Video Interest rate
Mempengaruhi faktor
Interest rates vary by:
- the government's direction to the central bank to achieve the government's goals
- the currency of the principal amount lent or borrowed
- the term to maturity of the investment
- the perceived default probability of the borrower
- supply and demand in the market
as well as other factors.
Maps Interest rate
Example
A company borrows capital from a bank to buy assets for its business. In return, the bank collects the interest of the company. (The lender may also need the rights to the new asset as collateral.)
Related terms
Basic rate usually refers to the annual rate offered on overnight deposits by the central bank or other monetary authority.
The annual percentage rate (APR) and annual effective rate or the annual equivalent rate (AER) is used to help consumers compare products with different payment structures on a per- generally.
The discount rate is applied to calculate the present value.
For interest-bearing security, coupon rate is the ratio of the number of annual coupons (coupons paid per year) per unit of nominal value, while current yield is the ratio of the annual coupon divided by the market price currently. Yield to maturity is the expected internal rate of return on the bond, assuming to be held to maturity, ie, the discount rate that equates all remaining cash flows to the investor (all remaining coupon and a nominal value redemption at the time maturity) at current market prices.
Monetary policy
Interest rate target is a vital tool of monetary policy and is taken into account when dealing with variables such as investment, inflation, and unemployment. The central banks of the country generally tend to reduce interest rates when they want to increase investment and consumption in the country's economy. However, low interest rates as macroeconomic policies can be risky and can lead to the creation of an economic bubble, where large amounts of investment are poured into the real estate market and the stock market. In developed countries, interest rate adjustments are made to keep inflation within target ranges for the health of economic activity or to limit interest rates along with economic growth to maintain economic momentum.
History
In the last two centuries, interest rates have been variously defined by national governments or central banks. For example, the Federal Reserve's federal funds rate in the United States varied between about 0.25% to 19% from 1954 to 2008, while the Bank of England base rate varied between 0.5% and 15% from 1989 to 2009, and Germany experienced levels approaching 90% in the 1920s to about 2% in the 2000s. During an effort to tackle spiral hyperinflation in 2007, Zimbabwe's Central Bank raised interest rates for loans to 800%.
Major credit interest rates in the late 1970s and early 1980s were much higher than those recorded - higher than previous US peaks since 1800, from the top of the UK since 1700, or from the top of the Netherlands since 1600; "As modern capital markets emerge, there is never a high long-term interest rate" as in this period.
Perhaps prior to the modern capital market, there are some accounts that savings deposits can achieve a minimum annual return of 25% and up to as high as 50%. (William Ellis and Richard Dawes, "The Lesson of the Phenomenon of Industrial Life...", 1857, p III-IV)
Reason for change
- Political short-term gain : Lowering interest rates can provide a short-term economic boost. Under normal circumstances, most economists think interest rate cuts will only provide short-term gains in economic activity that will soon be offset by inflation. Rapid impulse can influence the selection. Most economists advocate independent central banks to limit political influence on interest rates.
- Deferred Consumption : When money is lent, creditors defer spending money on consumer goods. Because according to the theory of time preferences people prefer goods now to the goods then, in the free market there will be positive interest rates.
- Inflation expectations : Most economies generally show inflation, which means that some money is bought less in the future than it does now. The borrower must compensate the creditor for this.
- Alternative investment : The lender has a choice between using the money in different investments. If he chooses one, he will forget the return from the others. Different investments are effectively competing for funds.
- Investment risk : There is always a risk that the borrower will go bankrupt, run away, die, or default on the loan. This means that the lender generally imposes a risk premium to ensure that, in all his investments, he is compensated for the failed.
- Liquidity preferences : People prefer to have their resources in a form that can be swapped immediately, rather than forms that take time to realize.
- Taxes : Since some of the benefits of interest may be taxed, the lender may insist on a higher rate to compensate for this loss.
- Bank : Banks may tend to change interest rates either to slow or accelerate economic growth. This involves raising interest rates to slow the economy, or lower interest rates to encourage economic growth.
- Economy : Interest rates can fluctuate according to economic status. Generally it will be found that if the economy is strong then the interest rate will be high, if the weak economy interest rate will be low.
Non-market based theory
Some economists like Karl Marx argue that the actual interest rate is not entirely determined by market competition. Instead, they argue that interest rates are ultimately set in line with social customs and legal institutions. Karl Marx writes:
"Customs, legal traditions, etc., have much to do with determining the average interest rate as competition itself, in so far as it exists not only as averages but as actual magnitudes.In many legal disputes, where interest must be calculated , the average interest rate should be assumed as the legal level. If we ask more about why the average interest rate limit can not be inferred from general law, we find the answer lies only in natural interest. "
Real vs nominal
The nominal interest rate is the interest rate without adjustment for inflation.
For example, someone deposits $ 100 with a bank for 1 year, and they receive a $ 10 interest (before tax), so by the end of the year, their balance is $ 110 (before tax). In this case, regardless of the rate of inflation, the nominal interest rate is 10% per year (before tax).
The real interest rate measures the growth in the real value of the loan plus interest, taking into account inflation. The principal plus interest payment is measured in tangible form compared to the purchasing power of the amount then borrowed, lent, deposited or invested.
If inflation is 10%, then $ 110 in the account at the end of the year has the same purchasing power (ie, bought the same amount) like $ 100 owned a year ago. The real interest rate is zero in this case.
Tingkat bunga riil diberikan oleh persamaan Fisher:
di mana p adalah tingkat inflasi. Untuk tingkat rendah dan jangka pendek, pendekatan linear berlaku:
The Fisher equation applies both ex ante and ex post . Ex ante , the rate is projected, while ex post , the exchange rate is historical.
Market rate
There is a market for investments, including money markets, bond markets, stock markets, and currency markets as well as retail banking.
Interest rates reflect:
- Risk-free capital costs
- Expected inflation
- Risk premium
- Transaction fees
Inflation expectations
According to the rationale of rational expectations, borrowers and lenders form expectations of inflation in the future. Acceptable nominal interest rates where they are willing and able to borrow or lend include the real interest rate they need to receive, or willing and able to pay, plus the inflation rate they expect.
Risk
The level of risk in investment is considered. Risky investments such as stocks and junk bonds are usually expected to deliver higher yields than safer ones such as government bonds.
An additional refund above the risk-free nominal interest rate expected from risky investments is the risk premium. The risk premium that investors demand on investment depends on investor risk preferences. The evidence shows that most lenders are risk-averse.
A maturity risk premium applied to long-term investments reflects a higher default risk.
Liquidity preferences
Most investors prefer their money to be cash rather than less worthy investments. Cash is ready to be spent immediately if needed, but some investment takes time or effort to transfer it into a spendable form. This is known as liquidity preference. The 1-year loan, for example, is very liquid compared to a 10-year loan. The 10-year US Treasury bond, however, is liquid as it can easily be sold in the market.
Market model
Model penetapan harga suku bunga dasar untuk suatu aset
Dengan asumsi informasi yang sempurna, p e adalah sama untuk semua peserta di pasar, dan ini identik dengan:
Where
- i r is a risk-free return to capital
- = nominal interest rate on short-term risk-free liquid bonds (such as US Treasury Bills).
- rp = a risk premium that reflects the length of the investment and the likelihood that the borrower will default
- lp = the liquidity premium (reflecting the perceived difficulty in turning assets into money and thus into goods).
Spread
The spread interest rate is the rate of the loan minus the deposit rate. This spread includes operating costs for banks that provide loans and deposits. A negative spread is where the deposit interest rate is higher than the interest rate on the loan.
In macroeconomics
Substitution elasticity
Substitution elasticity (full name is the marginal rate of substitution of relative allocation) affects the real interest rate. The greater the elasticity of substitution, the more exchanges, and the lower the real interest rate.
Output and unemployment
Higher interest rates increase borrowing costs that can reduce investment and output and increase unemployment. Expanding business, especially entrepreneurs tend to become net debtors. However, the Austrian School of Economics sees a higher level as it leads to larger investments to earn interest to pay its creditors. Higher interest rates encourage more savings and reduce inflation.
Open market operations in the United States
The Federal Reserve (often referred to as 'The Fed') implements monetary policy largely by targeting federal funds levels. This is the rate banks charge each other for overnight federal funds, which are reserves owned by banks in the Fed. Open market operations are one tool in monetary policy implemented by the Federal Reserve to control short-term interest rates using the power to buy and sell securities.
Money and inflation
Loans, bonds, and stocks have some characteristics of money and are included in the money supply.
By setting i * n , government agencies can influence the market to change the total loans, bonds and issued shares. In general, a higher real interest rate reduces the money supply extensively.
Through the quantity theory of money, an increase in the money supply causes inflation.
Impact on savings and retirement
Financial economists such as World Pensions Council (WPC) researchers argue that the extremely low interest rates in most of the G20 countries will have a devastating effect on the funding position of pensions as "without returns that exceed inflation, pension investors face the real value of their declining savings and not increase in the next few years "
From 1982 to 2012, most of the Western economy experienced a period of low inflation combined with a relatively high return on investment in all asset classes including government bonds. This brought a sense of complacency among some retired actuary and regulator consultants, making it seem reasonable to use the optimistic economic assumptions to calculate the present value of future pension liabilities.
The collapse of this long-lasting government bond yield takes place against the backdrop of further declining returns for other core assets such as blue chip stocks, and more importantly, silent demographic shock. Factoring in an appropriate "longevity risk", the pension premium can be significantly increased while the income can be frozen stagnant and the employees work longer years before retirement.
Mathematical note
Since interest and inflation are generally given as an increasing percentage, the above formula is (linear) approximate.
Contohnya,
hanya perkiraan. Kenyataannya, hubungan itu
begitu
Dua perkiraan, menghilangkan istilah pesanan yang lebih tinggi, adalah:
The formula in this article is appropriate if logarithmic units are used for relative change, or equivalent if index logarithms are used instead of tariffs, and resistant even for relatively large changes. Most elegantly, if natural logarithms are used, producing neper as a logarithmic unit, scaling of 100 to obtain a very small centineper unit equals a percentage change (hence roughly the same for small values), and the linear equations apply to all values.
Zero rate policy
The so-called "zero interest rate policy" (ZIRP) is a very low central bank target rate close to zero. At this lower zero limit the central bank faces difficulties with conventional monetary policy, since it is generally believed that market interest rates can not be realistically pushed into negative territory.
Negative face value
Nominal interest rates are usually positive, but not always. Conversely, real interest rates can be negative, when the nominal interest rate is below inflation. When this is done through government policy (for example, through reserve requirements), it is considered a financial repression, and practiced by countries such as the United States and the United Kingdom after World War II (from 1945) until the late 1970s or early 1980s (during and after the post-World War II economic expansion). In the late 1970s, US Treasury securities with negative real interest rates were considered foreclosure certificates .
In central bank reserve
The so-called "negative interest rate policy" (NIRP) is the central bank's negative (below zero) target interest rate.
Theory
Given the alternative of holding cash, and thus getting 0%, rather than lending it, lenders looking for profits will not lend under 0%, because it will guarantee losses, and banks that offer negative deposit rates will find some enthusiasts, as savers instead will hold cash.
Negative interest rates have been proposed in the past, especially at the end of the 19th century by Silvio Gesell. The negative interest rate can be explained (as by Gesell) as "tax on holding money"; he proposed it as a component of Freigeld (free money) from his Freiwirtschaft (free-economy) system. To prevent people holding cash (and thus get 0%), Gesell suggests spending money on a limited period of time, after which it must be redeemed for new bills; attempts to withhold money so that it expires and becomes worthless. In line with the same line, John Maynard Keynes agreed to cite the idea of ​​taxes that brought money, (1936,
It has been proposed that the negative interest rate in principle can be imposed on the existing paper currency through lottery serial numbers, such as randomly selecting the numbers 0 through 9 and declaring that the serial number ends in the digits is worthless, resulting in an average of 10% loss ownership of paper cash to hoarders; the pulled two digits can match the last two digits on the record for a 1% loss. It was proposed by anonymous student Greg Mankiw, though more as a mind experiment than the original proposal.
A much simpler method of achieving negative real interest rates and providing disincentives for cash holdings, is for the government to encourage monetary policy with little inflation; indeed, this is what Keynes recommended in 1936.
Practice
Both the European Central Bank began in 2014 and the Bank of Japan began in early 2016 pursuing policies above their previous and sustained quantitative easing policies. This latter policy was said at the beginning to try to change the Japanese deflationist mindset. In 2016 Sweden, Denmark and Switzerland - not a direct participant in the Euro currency zone - also have NIRP.
Countries like Sweden and Denmark have set a negative interest in the reserves - that is, they have attracted reserve interest.
In July 2009, Sweden's central bank, Riksbank, set its policy repo rate, the interest rate on a one-week deposit facility, at 0.25%, at the same time setting an overnight deposit rate of -0.25%. The existence of negative overnight deposit rates is a technical consequence of the fact that the overnight deposit rate is generally set at 0.5% below or 0.75% below the policy level. This is not technically an example of "negative interest on excess reserves," because Sweden does not have reserve requirements, but imposing a reserve rate without reserve requirements imposes implied reserves requirements from zero. The Riksbank studied the impact of these changes and stated in the comments report that they caused no disruption in Swedish financial markets.
Top bond yield
During the European debt crisis, government bonds from several countries (Switzerland, Denmark, Germany, Finland, the Netherlands and Austria) have been sold with negative results. The suggested explanations include a desire for safety and protection against the eurozone breaker (in this case some eurozone countries may poison their debt repayments to a stronger currency).
See also
- List of countries by interest rate of the central bank
- Macroeconomics
- Rate of return
- Short-level model
Note
References
- Homer, Sidney; Sylla, Richard Eugene; Sylla, Richard (1996). Interest Rate History . Rutgers Press University. ISBNÃ, 978-0-8135-2288-3 . Retrieved 2008-10-27 . Ã,
Source of the article : Wikipedia
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