Interest rate
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An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. Interest rate periods are ordinarily a year and are often annualized when not. Alongside interest rates, three other variables determine total interest: principal sum, compounding frequency, and length of time.
Interest rates reflect a borrower's willingness to pay for money now over money in the future.[1] In debt financing, companies borrow capital from a bank, in the expectation that the borrowed capital may be used to generate a return on investment greater than the interest rates. Failure of a borrower to continue paying interest is an example of default, which may be followed by bankruptcy proceedings. Collateral is sometimes given in the event of default.
In monetary policy and macroeconomics, term "interest rate" is also often used as shorthand for central bank's policy rate, such as the United States Federal Reserve's Federal Funds Rate. "Interest rate" is also sometimes used synonymously with overnight rate, bank rate, base rate, discount rate, coupon rate, repo rate, prime rate, yield to maturity, and internal rate of return.
- ^ Fisher, Irving (1907). The Rate of Interest: Its Nature, Determination and Relation to Economic Phenomena. New York: The MacMillan Company. p. 3. ISBN 1578987458.
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