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An interest rate is not a price, it's the extra percentage added to your loan if you borrow money (like a mortgage) or it's the extra percentage added to your savings.
Let us take simple examples: If the interest rate is 10% per annum (year) and you want to buy a house using a mortgage of £100,000, each year 10%, which is £10,000 would be added to what you owe. That means you would owe £10,000 more, but your monthly payments during the year would be calculated so that you not only paid back the £10,000 interest, but you would also have paid back some of the £100,000 loan. The amount that you still owed would reduce each year so that at the end of the term (the number of years that you want to borrow) you owed nothing.
If the interest rate was 10% per annum and you put £5,000 pounds into your savings account, and left it there for a year, you would have £500 added to your savings. If you left it in for another year you would be given 10% of what your account now holds (£5,500) which is £550. It's more than before because you are now getting interest on your interest. And so it would go on until you needed to draw your money out.
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What is the price-level effect?
The change in the interest rate due to a change in the price level.
What occurs when a bonds stated interest rate is less than the market interest rate?
Since the current market interest rate is higher, it is more attractive to a new investor then the bond with a lower interest rate. Thus, the price of the lower interest rate bond has to decline to be competitive with new bonds in the market.
Are usury law a price ceiling or a price floor?
Usury law put a ceiling on interest rate
What is the impact of interest rate movements on bond prices?
in closed economy the macro economic concept is that if interest rates increases people are want to deposit their money, in closed market if interest rate increases people want to put their bond
What are some financial variables that affect the price earnings ratio?
interest rate
How do you find interest rate?
To find interest rate you multiply the price by the time by the percent
What is the price-level effect?
The change in the interest rate due to a change in the price level.
What does the effect of rate of interest on bonds?
it will increase the price of bonds
Is current Market Rate of Interest the same as yield to maturity?
It depends. YTM is calculated in the same way as IRR. You take all future cash flows and discout it by x% and equate to current market price. Then you solve for x% and what you get will be YTM. So if current price of bond is calculated by current market rate of interest than YTM=Current Market Rate of Interest. How ever bond price not always is equal to that price. Very often current yield(coupon/current market price) is different from current rate of interest. In such case YTM will differ from Current Market Rate of Interest.
What occurs when a bond's stated interest rate is greater than the market interest rate?
The bond's price will be in premium, meaning exceed 100
What occurs when a bond's stated interest rate is less than the market interest rate?
Since the current market interest rate is higher, it is more attractive to a new investor then the bond with a lower interest rate. Thus, the price of the lower interest rate bond has to decline to be competitive with new bonds in the market.
What occurs when a bonds stated interest rate is less than the market interest rate?
Since the current market interest rate is higher, it is more attractive to a new investor then the bond with a lower interest rate. Thus, the price of the lower interest rate bond has to decline to be competitive with new bonds in the market.
How does subordination affect the interest rate on a bond?
Subordination affects the interest rate on a bond because it is unsecured and has lesser priority than that of an additional debt claim on the same asset. It has higher interest rate required to compensate for the higher risk. If interest rate has been increased the price of the bond will fall. If the price of the bond falls, the yield that can be earned will increase.
Whats the example of price risk?
exchange rate, interest rate, oil price, and inflation risk are all examples of financial risks.
What is an example of an inexpensive loan and a medium price loan and a expensive loan?
An inexpensive loan is one with a 0.12 percent interest rate. A medium price loan would be about a 6.5 percent interest rate. Lastly, an expensive loan would be one with an interest rate of 15 percent or more.
Difference between discount rate and interest rate?
Interest rate is the amount that is paid over and above the original loan amount. Discount rate is the amount of money that is cut or reduced from the original price.
Difference between interest rate and discount rate?
Interest rate is the amount that is paid over and above the original loan amount. Discount rate is the amount of money that is cut or reduced from the original price.
