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Definition Of:

interest rate

Bible DictionaryDictionary of Political Economy
The price(s) of obtaining the temporary use of money that one borrows from someone else who actually owns it, normally expressed as a percentage of the amount borrowed per year. Since loans and loan repayment extend over considerable periods of time and entail more complex security arrangements than a simple cash-on-the-barrelhead exchange, interest rates to be paid are normally spelled out as part of a relatively complex written contract between borrower and lender. Like most other prices in an advanced market economy, the going levels of interest rates are determined in rather well-developed, highly competitive markets (in this case, they are referred to as "credit markets" or "financial markets") by the interaction and mutual adjustment of supply and demand . The demand for loanable funds mainly comes from firms who need them for investment purposes, from households who want them mainly for the purchase of big-ticket consumer durable goods like houses or autos, and from national, state and local governments who want them in order to make up the difference between the amount of money available in the treasury from tax collections and the (larger) amount of money the government has nevertheless decided to spend in financing its various projects and programs. The supply of loanable funds comes mainly from individual household and business firm savings placed with financial intermediary firms such as banks, thrift institutions, and insurance companies or else mobilized directly from individual lenders through the issuance of bonds, notes and other credit instruments tradeable on financial markets. In economies such as our own that allow fractional reserve banking, a considerable portion of the supply of loanable funds comes through credit creation by the central bank and the banking system. It is a serious oversimplification to refer to "the" rate of interest because at any given time there will normally be a whole range of different rates of interest that vary according to (among other things) the particular form of lending (bank savings deposits, personal i.o.u.'s, secured mortgages, collateralized bank loans, corporate bonds, U.S. Treasury notes, etc.), the contractual terms upon which the money is loaned (duration of the loan, repayment schedule, fixed rate or floating rate, national currency in which the loan is to be repaid, etc.), and the perceived degree of risk that the particular category of borrower will default on his repayments. For theoretical or analytical purposes, economists often like to postulate the existence of a "pure" (completely risk free) rate of interest (closely approximated by the rate of return on very short-term U.S. government Treasury bills) and then analyze other real world interest rates in terms of various factors peculiar to particular types of loans that each cause some sort of "premium" to be added on to the pure rate of interest in proportion to the various kinds and degrees of risk entailed (risk of default, risk of inflation or currency devaluation reducing the real value of the repayment over time, risk that the debt would be hard to resell if the lender unexpectedly needs to get his money out before the term of the loan expires, etc.) More ...

 

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AAGRA
AAR
ABOLFAZL SHADVAR
ABSOLUTE POVERTY
ACCRUED INTEREST
ACHIEVED STATUS
ACID RAIN
ACUTE DISEASE
ADAPTATION
ADJUSTED GROSS ...AERO
AFFIRMATIVE ACT...
AG
AGE GRADES
AGE STRUCTURE
AGEISM
AGENCIES OF SOC...AGRA
AGRARIAN SOCIET...AGRIBUSINESS
AIDS (Acquired ...
AIR POLLUTION
ALAA
ALIENATION
ANDROGYNY
ANIMISM
ANOMIA
ANOMIE
ANOMIE THEORY
ANTHROPOLOGY
APARTHEID
APEC
APG
APPROPRIATE TEC...ARMS RACE
ARMS TRADE
ARRANGED MARRIA...ASCRIBED STATUS
ASSET PROTECTIO...
ASSETS
ASSIMILATION
AUTHORITARIAN P...
AUTHORITY
AUTOCRATIC RULE
AUTOMATION
Abatement
Abbey
Abbot
Ability-to-Pay ...Ablutophobia
Absolute Advant...
Absolute advant...Abundance
Acarophobia
Accelerator
Acceptance
Acceptance-reje...
Accolade
Accoutrement
Acerophobia
Acheronophobia
Achluophobia
Acid Rain
Acousticophobia
Acquired Endowm...Acquittal
Acre
Acrophobia
Act of Parliame...
Acting Speaker
Active Alumni M...Adaptive Expect...
Additive
Address in Repl...Administrator o...
Admiral
Adoubement
Advance estimate
Adventurous Shi...Adverse Selecti...Aeroacrophobia
Aeronausiphobia
Aerophobia
Affection
Agency problem
Agency problem ...Agency problem ...
Aggregate Deman...Aggregate Expen...Aggregate Suppl...
Aggregate demand
Aggregate supply
Aggression
Agincourt, Batt...Agliophobia
Agoraphobia
Agraphobia
Agrizoophobia
Agyrophobia

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