Interest rates are proportionate to credit quality and it shows the ability of the investor to pay at any given circumstance. World economic conditions vary by geography and country and the nature of inflation and deflation influences interest rates. Interest rate is also determined by the government through its enactment of public policy called interest rate subsidy (Montalbano, 6). Interest rate term structures evidences how they are determined by future expectations of the value money.
However in the absences of the aforementioned determinants, interest rates are determined by the supply and demand for funds. 2. Interest is the premium paid for use of borrowed money. The interest for loans is usually fixed for a certain number of years after which if there is delay in payment the interest rate adjusts upwardly each year. The value of dollar can increase or decrease depending on the supply and demand imbalance.
However, lending of money is associated with risks as the lender can not be certain whether or not the borrower will pay the money back. In order for the lender to reduce the risks, it is important to secure the loan with a physical property such as real estate. Additionally, examining of one’s ability to pay back the money by use of credit score range can help reduce the risks of lending. 3. Interest rates are also determined by the supply and the demands for funds.
This shows that at whatever rate of borrowing, the borrower believes he/she has borrowed at the lowest rate and he/she can even provide higher interest rates on the same funds (Montalbano, 12). On the other hand, the lender believes the funds cannot be lent at a higher rate and there is certainty to receive interest and return of principal. Works Cited Montalbano, J. How are interest rates determined? 201. Viewed August 14 2010 from <http://www. ehow. com/how-does_4880725_how-interest-rates-determined. html>