Marco asked in Business & FinanceInvesting · 8 years ago

What is Interest rate(s)?

When we refer to interest rates on macroeconomics books what are we exactly talking about in real financial markets? There are thousands of interest rates people can choose from when they invest their money and they differ massively one to the other. Thanks.

Update:

As you asked I try to add some details to my original question: when we have models showing the choice between keeping the money in bank accounts and investing it and the where the decision is based on investment rates, what ir are we referring to? Bonds? Stock markets? A pondered average?

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  • 8 years ago
    Best Answer

    I think it refers to performance of the economy. Economy, stocks and Government bonds are quite related. Your question is so short, but i will try to explain some.

    Interest rate is to lend your money to some one for some period provided that he return you some annual interest on that money.

    Example: when you deposit your cash in the bank you receive some interest. It can range fro 0% - 2% in some banks.

    Bonds are best examples. Yield (Interest rates) of bonds reflect the performance of a company or government. Investors usually buy bonds when the economy is not so good. Why? Because bonds have less risk than stocks.

    Company (Example: General Electric or Ford or Google any other company) can sell bonds. Investors will buy these bonds. Now the investor cannot receive his cash back for some months or years. It can be 3, 6 months, 1 year, 2 years, 5 years, 10 years, 30 years...etc depending on the maturity of the bonds. But the investor will receive interest on these bonds each year.

    Unlike bank deposits, bonds value can go up or down. If a company makes good profits, the value of bonds will go up, and the interest rate will go down. This means the company will pay less interest rate every time it makes good revenue and profits. How can bonds go up or down? Depends on demand. If more investors buy bonds, the value of the bonds will go up, and interest rates paid by the company goes down. It purely depends on the performance of the company, and it is balance sheet.

    Source(s): Investor
  • Anonymous
    8 years ago

    An interest rate is the rate at which interest is paid by *any* borrower for the use of money that they borrow from a lender.

    That borrower could be *you* borrowing money from *your bank* (in the form of a loan). Or, if you are filthy rich, the borrower could the *the bank* borrowing money *from you* (in the form of savings accounts, for example).

    But... why is one interest rate different from another? Part of the reason is how much control over the money you let other people have over your money, and for how long.

    Let's say I have $1000 in my savings account, but I can go to the bank and withdraw it anytime I want. I'm not going to get a very high interest rate on that -- because the bank can't loan it out to other people and make money on it.

    But let's say I have $1,000,000 in the bank, and I tell the bank "you can freeze my $1,000,000 for a whole year -- I can't touch it. You can do whatever you want with it." I'm going to make a lot more money off of that -- because the bank will be able to loan my $1,000,000 out as car loans, house mortgages, education loans...

  • JoeyV
    Lv 7
    8 years ago

    I think your question is more like "My macro economics book says 'If interest rates rise, then [blah] happens' but there are billions of interest rates so what are they talking about?".

    First off, interest rates are even more diverse than you talk about as many of the most important rates are rates at which "people" can't do anything. For example, the Fed discount rate is a very important rate and is what is talked about when people say "The Fed is raising interest rates". That rate is only available for bank borrowing from the Fed, not for people investing.

    I wonder if you are a hard scientist. Physicicsts and whatnot get all bent out of shape about those kinds of statements in econ texts because as you say they aren't very precise. However the answer is that your book is telling you what I would call a "stylized fact". It;s true as long as you put in the most relevant interest rate at the particular time and since it;s only probabilistically true anyway being overly precise with what interest rate you mean doesn't help much. Interest rates are highly correlated anyway, so saying "If interest rates rise" most times applies to nearly all interest rates.

    There is no question that comparing the Fed overnight dollar swap rate (in which our central bank lends to say Germany's central bank for 1 day) is not very comparable to the current 5-yr C-rated bond rate so at the fringes interest rates can refer to very different things.

  • Anonymous
    8 years ago

    Keep it simple,

    Interest is the cost of borrowing money. I have to pay an additional cost (the interest) to borrow the money

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