A price, i.e. interest, must be paid for each temporary transfer of capital. If the price of borrowed capital is expressed as a percentage, the interest rate is used. The interest rate usually refers to a calculation period of one year. This is identified by the abbreviation “pa” (per anno). Monthly and quarterly calculations are also used. The basis for setting the interest rate is the cost that the lender incurs from lending the capital. In addition to the customary rate of interest (average of the effective rate of interest for mortgages, government bonds and mortgage bonds), the usual rate of interest for banks is also known. This is allocated independently of the individual banks and different types of credit.
The interest rate includes the refinancing costs of the lenders. Most institutions such as B. Banks in turn borrow from other banks or directly from the Best Bank. This refinancing incurs costs that are usually passed on to the borrower. In addition, the lender’s current margin is included in the interest rate, including profit and any costs.
Types of interest rates
The three main types of interest rates are nominal, effective and real. The nominal interest rate is the interest rate that is agreed between the lender and the borrower in the case of long-term financing. This is in contrast to the effective interest rate. All other factors determining costs are included in this. These include, for example, nominal interest rate, payment rate, processing fees, repayment rate-dependent factors and interest dates. A loan, in which the factors can vary, is called an initial annual percentage rate.
In contrast, the real interest rate in the economy denotes an interest rate that indicates the change in value and interest. The rate of change in price is included. The advantage of specifying a real interest rate is that inflation and deflation are taken into account. The real interest rate is calculated by subtracting a price change rate, for example the gross domestic product, from the nominal interest rate. The real interest rate is therefore a nominal interest rate corrected by the rate of change.
basic interest rates
The fixed rate for capital market management is known as the key interest rate and is set by the central bank responsible in the respective country. In the EU, the Best Bank is responsible for setting the base rate for the USD. The base rate sets the costs at which commercial banks can refinance with the Best Bank. This interest rate is decisive for the available liquidity in a currency area. The lower the fixed interest rate of a currency area, the more liquidity is in the money market cycle. This is intended to promote the willingness of states and companies to invest. However, if a small amount of money is in demand and inflation is to be counteracted, the key interest rate is increased. Which also leads to a certain willingness to deposit savings and thereby withdraw liquidity from the market.
However, a wide range of other interest rates still play an important role in the free economy. For example, mortgage lenders are more oriented to the Pfandbrief curve. Nevertheless, the base rate of a monetary union is an important base rate. Another basic interest rate is the spare interest rate. This is traditionally used for short-term savings and contains the effective interest rate for deposits that are invested by households with a three-month notice period.
Internal interest rate
By definition, the internal rate of return is the interest rate that is used when the capital value of an investment or investment is always exactly 0. Therefore, the cash value and the cash value are the same. The internal interest rate is used to determine the average return on the capital tied up in an object. In practice, however, a zero sum is rarely reached. Therefore, various methods such. B. applied linear interpolation. In this way it can be determined whether an investment is worthwhile. This is always the case if the calculation interest rate is lower than the internal interest rate.
The interest rate is used in the valuation of companies and is part of the so-called discounted cash flow analyzes. The calculation interest rate denotes the minimum return of an investor on the company to be invested and determines how much payments will be written down to their present value in the future.
The calculation interest rate is determined in which a risk premium is increased to the cost of capital (investment) or reduced (lending). This makes it clear that a high return requirement is synonymous with a riskier and short-term investment. This result is due to the stronger weighting of current payments.
Effects of interest rates
Interest rates and their level have a major impact on the capital market and the economy. Almost every industry is at least indirectly affected by the development of interest rates. High interest rates are putting pressure on the consumer climate and investors’ willingness to invest is falling. A direct result is dwindling corporate profits. Because, as described above, a high key interest rate will result in higher savings for consumers. This money is thus withdrawn from the free market and leads to a decline in demand for consumer goods. Ultimately, deflation can set in and lead to massive price devaluations.
On the other hand, low interest rates can give the economy a new boost. The lower refinancing costs of loans allow banks to lend more loans to companies. These loans in turn lead to new investments and the creation of new jobs. This in turn leads to increased purchasing power among consumers. Many industries benefit from this development. Examples include mortgage lenders, the construction industry and consumer goods manufacturers. Disadvantages can be inflation that creeps in at first and gallops in the later stages, insofar as central banks cannot react or react quickly enough by increasing the key interest rate.