The interest is paid a tax on borrowed capital. Assets made money,
shares, consumer goods through hire purchase, major assets, such as airplanes,
factories and even in lease agreements. Interest is calculated on the
value of the assets in the same way as money. Interest can be thought
of as "rent money." For example, if you want to borrow money
from the bank, there is a certain level you have to pay for how much you
want a loan.
The fee is compensation to the lender for foregoing other useful investments
that could have been done with borrowed money. These investments are at
the forefront known as opportunity cost. Instead, the lender using the
assets directly, they advanced to the borrower. The borrower then enjoys
the advantage of using the assets before the effort needed to obtain them,
while the lender has the advantage of the tax paid by the borrower for
the privilege. The amount of loan, or the value of the assets transferred,
is called the director. This value is held by the borrower credit. The
interest is the price of credit, not the price of money, as is common
and may wrongly it seems. The percentage of the principal is paid as a
fee (interest) for a period of time, is called the interest rate.
An interest rate is the price of a borrower pays for the use of money
is not clean, and the return of a lender receives for the postponement
of the money lent to the borrower. Interest rates are usually expressed
in percentage during the period of one year.
Targets of interest rates are also a vital tool of monetary policy and
are used to control variables such as investment, inflation and unemployment.
Interest rates throughout history have been established by several national
governments or market forces. For example, U.S. the federal funds rate
has fluctuated between about 1% to 19% from 1954 to 2008, while the rate
for the United Kingdom has fluctuated between 15 and 2% from 1989 to 2008,
and Germany has seen rates of almost 90% in the 1920s to about 2% in 2000
The causes interest rates
Deferred consumption. When money is loaned the lender delays spending
money on consumer goods. Since that time preference to the theory of the
assets of people now prefer to own later in a free market, there will
be interest rates.
Inflation. Most economies in general, inflation, which means a certain
amount of money buys fewer goods in the future than it is now. The borrower
must compensate the lender for this purpose.
Alternative investments. The lender has the option to choose between using
their money into different investments. If a party elects waiving the
profitability of all others. Different investments to compete effectively
the funds.
The risks of investment. There is always a risk that the borrower is bankrupt,
abscond or otherwise default on the loan. This means that the lender typically
charge a risk premium to that through their investments, which is cleared
for those who do not.
Liquidity preference. People prefer that their resources available in
a form that can be exchanged immediately, instead of a form that you have
the time or money to achieve.
Taxes. Because some of May interest income to be imposed, the lender may
insist on higher rates to compensate for this loss.
Market interest rate
There is a market for the investments that ultimately includes the money
market, bond market, stock market and currency market, retail and financial
institutions such as banks.
Exactly how these labor markets is a complex issue. However, economists
generally agree that interest rates resulting from the investment, taking
into account:
Risk without the cost of capital
Inflationary
The level of risk in investment
The cost of the operation
Risk-free cost of capital
Risk without the cost of capital is the real interest on a loan without
risk. Even if no loan is never entirely risk free, invoices issued by
the major nations like the United States are generally considered safe
for reference.
This fee includes the postponement of consumption and investment alternative
elements of interest.
Risk
The level of investment risk is taken into account. That is why very volatile
investments like stocks and bonds to secure greater benefits reactions
as bonds.
Interest income in excess of investment risk is the risk premium. The
risk premium depends on the lender's risk preferences.
If the investment is 50% chance of bankruptcy, a risk-neutral lender
will require his return to double. Therefore, for an investment return
normally $ 100, which should Back $ 200. A risk-averse lender, which would
take more than $ 200 and risk a return lender lovers least $ 200. The
evidence suggests that most donors are in reality the risks.
In general, a long-term investment carries a risk premium due, because
the long-term loans are at heightened risk of failure during their period.
The production and unemployment
Interest rates are the main determinant of investment on a macro scale.
Generally speaking, if rising interest rates through the Board, and then
investment decreases, causing a fall in national income. Note that if
interest rates are high, ie, the broad economy is doing well and, therefore,
people would be willing to borrow money at high interest rates.
Interest rates are set by a government institution, usually a central
bank, as the main instrument of monetary policy. The institution offers
to buy or sell money to the desired rate and, because of its enormous
size, are able to effectively i * n.
By changing i * n, the institution is able to influence interest rates
faced by all those who want to borrow money for economic investment. The
investment can change quickly to changes in interest rates, affecting
national income.
Okun, through the law of the evolution of production on unemployment.
The money and inflation
Loans, bonds and shares have some characteristics of money and are included
in the broad money supply.
Through the establishment of i * n, the government institution can affect
market trends in the total amount of loans, bonds and equities. In general,
higher real interest rate reduces the broad money supply.
With the quantity theory of money, increasing the money supply to inflation.
This means that interest rates may affect inflation in the future.
Interest is the price paid for the use of savings for a certain period
of time. In the ancient biblical Israel, which was against the law of
Moses to receive interest on private loans. In the Middle Ages, the time
has been regarded as the property of God. Therefore, charging interest
was considered commerce with the Property of God. On the other hand, St.
Thomas Aquinas, the first theologian of the Catholic Church, argued that
charging interest is wrong because it amounts to "double billing,
charging the thing and the use of the thing. The Church considers a sin
to wear, but this rule has never been strictly observed and eroded gradually
until it disappeared during the industrial revolution.
The wear has always been viewed negatively by the Roman Catholic Church.
The Second Lateran Council condemned any repayment of a debt of more money
than what was originally lent, the Council of Vienna stated explicitly
prohibits usury and legislation tolerant of usury to be heretical, and
the first scholastics criticizes the collection of interests. In the medieval
economy, the loans were entirely a result of the need (bad harvests, a
fire in the workplace) and in such circumstances, it was considered morally
reprehensible to receive interest.
The interest has often been neglected in the Islamic civilization, and,
most researchers agree that the Koran explicitly prohibits this practice.
Medieval jurists developed several financial instruments to promote responsible
lending. These instruments are similar to those interests sometimes leads
some to wonder if they really fulfill the spirit and letter of the rule.
In the Renaissance, greater mobility of people has facilitated an increase
in trade and the emergence of appropriate conditions for entrepreneurs
to start new businesses profitable. Given that the borrowed money is no
longer strictly for consumption but for production, and therefore can
not be treated the same way. The School of Salamanca has developed a variety
of reasons that justify the charging of interest. The person who received
a loan and received, one might consider that the interest paid a premium
for the risk taken by the loan. There is also the question of opportunity
cost, because the party has lost the loan of other opportunities to use
the borrowed money. Finally, and perhaps most was the source of its review
of money as property, and use their money for something that should receive
a benefit in the form of interest. Martin de Azpilcueta also examined
the effect of time. All things being equal, we prefer to receive a good
date, more than in the future. This preference indicates a higher value.
Interestingly, under this theory, the payment is on the list individual
is deprived of money.
Economically, the interest rate is the cost of capital, and is subject
to the law of supply and demand of money supply. The first attempt to
control interest rates through the manipulation of the money was made
by the French Central Bank in 1847.
The first formal study of interest rates and their impact on society
were made by Adam Smith, Jeremy Bentham and Mirabeau during the birth
of classical economic thought. At the beginning of the 20th century, Irving
Fisher made a breakthrough in the economic analysis of nominal interest
rates of interest in distinguishing real interest. Several perspectives
on the nature and impact interest rates have emerged since then. Among
scholars, the more modern views of John Maynard Keynes and Milton Friedman
are widely accepted.
The second half of the 20th century saw the rise of interest-free Islamic
banking and finance, a movement that attempts to apply religious law developed
in medieval times to the modern economy. Some entire countries, including
Iran, Sudan and Pakistan, have taken steps to eradicate the interests
of their financial systems entirely.
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