Interest rate

Interest rate - the amount indicated in percentage terms to the amount of the loan paid by the loan recipient for using it per a certain period ( month , quarter , year ).

From the standpoint of the theory of money , the interest rate is the price of money as a means of saving .

Interest income - income from the provision of capital in debt in various forms (loans, credits), or this is the income from investments in securities .

Content

Interest Rate History

Over the past two centuries, base interest rates have been set by either national governments or central banks . For example, the US Federal Reserve Reserve Rate ranged from 0.25% to 19% between 1954 and 2008, while Bank of England base rates ranged from 0.5% to 15% between 1989 and 2009 ^{[ 1]} ^[2] , and the spread in base rates in Germany ranged from close to 90% in the 1920s to about 2% in the 2000s ^[3] ^[4] . During an attempt to overcome the hyperinflationary spiral in 2007, the Reserve Bank of Zimbabwe raised loan interest rates to 800% ^[5] .

Types of Interest Rates

There are several types of interest rates.

Fixed and floating rates

Depending on whether the rate changes over time, fixed and floating interest rates are allocated:

Fixed interest rate - constant, set for a certain period and does not depend on any circumstances ^[6] .
The floating interest rate is subject to periodic review ^[7] . The rate change is based on fluctuations of certain indicators. A classic example of such indicators is the London interbank supply rate (LIBOR, the weighted average rate on the London interbank credit market). Accordingly, a floating rate of LIBOR + 5% will mean that the nominal value of the interest rate is 5% higher than the LIBOR rate.

Decursive and antisipative rates

Depending on the time of interest payments, there are two types of interest rates: ^[8]

decursive rate - interest is paid at the end along with the main loan amount
antisipative rate - interest is paid at the time of the loan (in advance) and is determined based on the final amount of the debt.

An antisipative rate is more profitable for a lender, and a discursive rate for a borrower. So, if the interest rate is 10%, then at a decursive rate with a loan of 1000 p. the lender will receive 1100 p. at the end of the term. At an antisipative rate, he will give the borrower 900 p. and at the end of the term will receive 1000 p.

Real and nominal rates

Distinguish between nominal and real interest rates.

Nominal interest rate - market interest rate excluding inflation, reflecting the current valuation of monetary assets.

Real interest rate - the interest rate adjusted for inflation .

The relationship between the real, nominal rate and inflation is generally described by the following (approximate) formula:

i_{r}=i_{n}-\pi

{\ displaystyle i_ {r} = i_ {n} - \ pi}

,

Where

$i_{n}$ ${\ displaystyle i_ {n}}$ - nominal interest rate,
$i_{r}$ ${\ displaystyle i_ {r}}$ - real interest rate,
$\pi$ ${\ displaystyle \ pi}$ - the expected or planned inflation rate.

Irving Fisher proposed a more accurate formula for the relationship between real, nominal rates and inflation, expressed by the Fisher formula named after him:

i_{r}={\frac {1+i_{n}}{1+\pi }}-1={\frac {i_{n}-\pi }{1+\pi }}

{\ displaystyle i_ {r} = {\ frac {1 + i_ {n}} {1+ \ pi}} - 1 = {\ frac {i_ {n} - \ pi} {1+ \ pi}}}

At $\pi =0$ ${\ displaystyle \ pi = 0}$ and $\pi =i_{n}$ ${\ displaystyle \ pi = i_ {n}}$ both formulas give the same meaning. It is easy to see that at low inflation rates $\pi$ ${\ displaystyle \ pi}$ the results do not differ much, but if inflation is high, then the Fisher formula should be applied.

According to Fisher, the real interest rate numerically should be equal to the marginal productivity of capital .

Interest Rates

Nominal interest rates on loans can be greater than zero, equal to zero ("interest-free loan") and less than zero ^[9] ("negative" interest). If real interest rates reach a large value, this leads to usury .

Notes

↑ Interest Rate History Archived October 16, 2008 on Wayback Machine . Retrieved 2008-10-27
↑ UK interest rates lowered to 0.5%
↑ Homer, Sylla & Sylla, 1996 , p. 509.
↑ Bundesbank . BBK - Statistics - Time series database Archived February 12, 2009 on Wayback Machine . Retrieved 2008-10-27
↑ Zimbabwe currency revised to help inflation (unopened) (inaccessible link) . Date of treatment October 31, 2011. Archived February 11, 2009.
↑ Fixed interest rate (unopened) . National Economic Encyclopedia. Date of treatment July 16, 2013. Archived July 19, 2013.
↑ Borisov A. B. Floating interest rate // Big Economic Dictionary. - M .: Book World, 2003 .-- 895 p. - ISBN 5-8041-0049-1 .
↑ Borisov A. B. Interest rate // The Big Economic Dictionary. - M .: Book World, 2003 .-- 895 p. - ISBN 5-8041-0049-1 .
↑ Moiseev S. R. Money with a negative interest rate // Money and credit, 2017. - No. 10. - S. 16-26.

Literature

Nechaev V.M. , Yarotsky V.G. Percentage, in economics and from a legal point of view // Brockhaus and Efron Encyclopedic Dictionary : in 86 volumes (82 volumes and 4 additional). - SPb. , 1890-1907.
John C. Hull. Chapter 4. Interest rates // Options, futures and other derivative financial instruments = Options, Futures and Other Derivatives. - 6th ed. - M .: "Williams" , 2007. - S. 133-165. - ISBN 0-13-149908-4 .
Homer, Sidney; Sylla, Richard. A History of Interest Rates . - Rutgers University Press , 1996. - ISBN 978-0-8135-2288-3 .

[1] Interest Rate History Archived October 16, 2008 on Wayback Machine . Retrieved 2008-10-27

[2] UK interest rates lowered to 0.5%

[_af88b0e67530c36b-3] Homer, Sylla & Sylla, 1996 , p. 509.

[4] Bundesbank . BBK - Statistics - Time series database Archived February 12, 2009 on Wayback Machine . Retrieved 2008-10-27

[5] Zimbabwe currency revised to help inflation (unopened) (inaccessible link) . Date of treatment October 31, 2011. Archived February 11, 2009.

[6] Fixed interest rate (unopened) . National Economic Encyclopedia. Date of treatment July 16, 2013. Archived July 19, 2013.

[7] Borisov A. B. Floating interest rate // Big Economic Dictionary. - M .: Book World, 2003 .-- 895 p. - ISBN 5-8041-0049-1 .

[8] Borisov A. B. Interest rate // The Big Economic Dictionary. - M .: Book World, 2003 .-- 895 p. - ISBN 5-8041-0049-1 .

[9] Moiseev S. R. Money with a negative interest rate // Money and credit, 2017. - No. 10. - S. 16-26.