Interest Rate

Any entity borrowing money from a lender, also need to pay a cost, known as the interest. Till the entire principal is repaid back to the lender, the borrower has to pay this interest, that in most cases is in the form of periodic payments to the lender.

In finance, the term interest rate refers to this cost (or interest) expressed as a percentage of the principal amount.

In any society, there is no dearth for borrowers or lenders, and therefore, the different types of interest rates from the Fed fund rates to the rate charged by a loan shark.

Let's take a look at a few important borrowers in the US economy.

1. US Government, where the Govt pays an interest to those investors purchasing its Treasury notes and bonds.

2. A Savings Bank, where the Bank will give an interest on the saving deposits.

3. An individual taking a mortgage loan, making the monthly payments at an interest rate charged by the lender.

4. A depository institution (such as a Bank) borrowing money from another depository institution to meet the reserve requirements. The interest rate in this case is fixed by the Federal Reserve and is known as the Fed Funds rate.

5. A corporation issuing a bond.

Normally, all these interest rates move together, that, when we talk about increasing interest rates in an economy, it refers to the general trend of increasing borrowing costs for the Treasury or a home buyer.

How are these interest rates moving in tandem ?