Interest Rate

Question 1

refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal.

Answer 1

Interest Rate

Question 2

where the rate remains constant throughout the term of the loan

Answer 2

Fixed Rate

Question 3

where the rate is variable and can fluctuate based on a reference rate.

Answer 3

Floating (Variable) Rate

Question 4

The interest expense also known as the cost of borrowing money.

Answer 4

Cost of Borrowing

Question 5

This type of interest is calculated on the original or principal amount of loan.

Answer 5

Simple Interest

Question 6

Simple Interest Formula

Answer 6

Interest = Principal Amount x Rate per year x Time

Question 7

is calculated not just on the basis of the principal amount but also on the
accumulated interest of previous periods. This is the reason why it is also called “interest on interest.”

Answer 7

Compound Interest

Question 8

Compound Interest Formula

Answer 8

A = P (1+r/100)n
where
A = total amount after n years
P = principal or original value
r = rate of interest per annum
n = number of years the money is invested

Question 9

Forces Affecting Interest Rates

Answer 9

Forces of Demand and Supply
Inflation
Government

Question 10

Interest rates are influenced by the demand for, and supply of, credit in an economy. An increase in demand for credit eventually leads to a rise in
interest rates, or the price of borrowing. Conversely, a rise in the supply of credit leads to a decline in interest rates. The credit supply increases when the total amount of money that’s borrowed goes up.

Answer 10

Forces of Supply and Demand

Question 11

The higher the inflation rate, the higher interest rates rise. That is because interest earned on money loaned must compensate for inflation. As compensation for a decline in the purchasing power of money that they will be repaid in the future, lenders charge higher interest rates.

Answer 11

Inflation

Question 12

In some cases, the government’s monetary policy influences the amount of interest rates. Also, when the government buys more securities, banks are injected with more money to be used for lending, and thus interest rates decrease. When the government sells these securities, money trom the banks gets drained, giving banks less money for lending purposes and leading to a rise in interest rates.

Answer 12

Government