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Interest rates have three main componets. One is inflation. Any interest rate must be at least the rate of inflation, or the money will be worth less when it is repaid than when it was lent. Another component is risk. Borrowers who are perceived to be a higher risk will be charged a higher interest rate. This allows the lender to recoup his losses from the higher risk borrowers who default via the excess received from those who don't. The final component is the true cost of money. This is more theroetical then practical. However, risk free debt instruments during periods of no inflation often have a rate of 3%.
[[Interest rate]]s have three main components:
* [[inflation]]
* risk
* true cost of money
Any interest rate must be at least the rate of inflation, or the money will be worth less when it is repaid than when it was lent.
There are many different [[interest rates]], but the benchmark interest rate—or overnight target rate—is set by the Central Bank of a nation typically. A change or expected change in this rate will lead to changes in other interest rates.
Borrowers who are perceived to be a higher risk will be charged a higher interest rate. This allows the lender to recoup his losses from the higher risk borrowers who default via the excess received from those who don't.
The final component is the true cost of money. This is more theroetical then practical. However, risk free [[debt]] instruments during periods of no inflation often have a rate of 3%.
There are many different interest rates, but the benchmark interest rate—or overnight target rate—is set by the Central Bank of a nation typically. A change or expected change in this rate will lead to changes in other interest rates.