Complete Guide To Corporate Finance

The Business Finance Guide

The general definition of an interest rate is an amount of money that the borrower pays to the lender in order to obtain the loan. They are usually calculated on a yearly basis and they represent a percentage of the total loan. There are various classifications of interest rates and it is essential to understand each type of rate in order to choose the one that best suits your needs.

The most common mistake that people make when discussing interest is to mistake nominal rates with the real ones. The nominal interest rates are the ones where inflation was not taken into account. A variable rate is a way in which a financial institution is compensated for delaying its use of the money. If a currency’s value is decreased this will also have to be compensated by a borrower. These are the main types of interest rates that concern the common consumer.

When we are talking about bigger financial institutions different kinds of rates are being used. For example when banks lend money to each other they do not apply the general interest rates. Instead they use the Federal Funds Rate. The money that is lent must fall under the category of federal funds or excess reserves. This interest rate can change on a daily basis and it can also serve as an indicator of general. interest rate tendencies.

Another indicator of the general interest rates is a Prime rate. This refers to the interest rate charged by banks to big corporations. This type of rate is usually applied for small term loans. This rate is higher that the federal rate but that does not come as a surprise as interest rates are always higher when it comes to short term loans. Speaking of short term loans, these fall under the government of other types of interest rates. The short rate is connected to the prime rate and it entails a rate charged for short term loans that are taking place within a particular market.

Due to the high risks we have a natural fear of borrowing money from banks. They usually impose strict conditions and leave little to no room for negotiations. However loaning money doesn’t have to be a bad thing. It can help you make an investment that will generate a lot of money. The most important thing when dealing with banks is understanding the way they work and the first step is to learn the different types of interest rates. This time the next time you will see a news report on TV regarding the increase of interest rates you will know to what kind of rates it is referring to.

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