Interest Rate

The interest rate is the percentage of the principal amount that borrowers has to pay on a given period. If the rate is fir 1 year then interest rate is known as annual percentage rate (APR)

An interest rate can also apply to the amount earned at a bank or credit union from a saving account or certificate of deposit.

Interest rate can be simple interest rate and compound interest rate. In simple interest rate borrowers have to pay interest on the principal amount only on the other hand in compound interest borroers have to pay interest on principal amount as well as on interest payment.

Impact of changing interest rate on private investment.

Increase in interest rate leads crowding out effect( Reduce in investment by private company) because opportunity cost ( ) of holding cash in present increases so investors will have to pay higher interest payment which will reduce investment by private company.

Impact of changing interest rate( Repo rate, bank rate)

Increase in interest rate will induce the investors and household to save/invest nore because opportunity cost of holding money in present is high so people will refrain from current consumption and invest on different financial instruments due to this money supply in economy will reduce therefore demand will also go down and inflation (general price level) will reduce.

Written by - Aman Singh | LinkedIn