Themes

What is Interest definition/concept/elaboration

The term refers to the benefit that one has or pays for the granting or acquisition of a loan; it is requested especially when you don’t have a specific value at a certain time. Interest may entail a risk, that is, the possibility of not being properly returned or having some kind of problem. The greater the risk, the interest increases and vice versa. It is measured as a percentage of the credit in question. This percentage is expressed in relation to the unit of time, usually per year.

Interest-bearing credit can be acquired in a number of ways. One example is the credit card, which offers the opportunity to pay the consumer in exchange for charging interest. In general, in these cases, the system employed is highly costly for the consumer, causing the debt to grow exaggeratedly if it is not paid off quickly. Some of the ways to earn interest are: putting money in the bank in a fixed term, buying debt securities of a country, company , etc. But as said before, many of these operations involve risk, and the greater the risk taken, the greater the interest to be charged.

When the interest rate is higher than inflation, it is said that it is positive; just as, when it is below inflation, it is negative. The interest rate less than inflation is called the real interest rate. So, for example, if the interest rate is ten percent and the rate of inflation (general rise in prices) is two percent, then there will be a positive real interest rate of eight percent. All this type of calculation seems to be simple, but sometimes it is not easy to have a realistic information on inflation, because in situations of countries with these problems, the calculations are done in a rigorous way.

As mentioned earlier, it often carries some risk. However, there is also the risk-free interest rate. An example of this circumstance can be offered by US Treasury bonds.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button