Financial Markets and Institutions 2: The meaning of interest rates

Question 1

What’s the role of ‘interest rates’?

Answer 1

Interest rates:
▶ Link the present to the future.
▶ Tell the future reward for lending today.
▶ Tell the cost of borrowing now and repaying later

Question 2

Describe ‘future value’

Answer 2

• Future value is the value on some future date of an investment made today.
  - What is the future value of £100 deposited in an interest-bearing account
  today at 5% interest?
  Future Value = FV = PV (=Present Value) + PV × (i) = PV × (1 + i)
• The higher the interest rate or the higher the amount invested, the higher
  the future value.