Question

Simply put, interest is the cost of money. However, in the corporate world the cost of money is anything but simple. Many factors determine the interest rate for a given situation. Discuss the various determinants of interest rates. What are the primary determinants of today’s corporate interest rates? What factors might cause today’s rates to change significantly? What is your outlook on the future of interest rates?

Answer 1

ANS) The interest rate means the cost of interest which is rewarded on the deposits and which is determined by the interconnection of the contribution and demand for amount in the money market place.And this kind of interest rate is mostly seen in the bank deposits and also mainly on the loans.

-- The major determinants are, Original Risk Free Rate Of Interest that is commonly said as the K*.This is commonly known as the interest rate which is in a safe security if no inflation was really believe to be get or when the inflation is absolutely 0.

-- The next one is Nominal Risk Free rate and this means,it is the correct amount of interest which is imposed by the person who gave the fund and which is paid by the person who needs the fund and which is mainly made of real risk free rate of interest

--The next one is Default Risk Premium means that is the difficulty or danger that the person who borrowed the money in the name of loan will feel when he or she did not paid the interest.

-- The next one is the Liquidity Risk Premium and this is one kind of premium which is imposed for receiving the risk or danger on the safety with a weak liquidity risk premium.

-- The last one is the Maturity Risk Premium,this is also a kind of premium which is imposed by the the person or organization who invests the money for the capital mislaying because of the market interest rate difference.

-- Any way the interest rate in some case of bank deposit interest,it is inspiring the people to deposit the money.But in every field the interest rate is constantly changing and one another thing is that all the different types of loans are having different interest amount

-- The danger condition which is faced by the person or organization who gives the money is that the borrower some times will not return the money,so in that condition interest gives a definite repayment for taking risk.In some cases,at the time when you give the money,the cost of goods may increase by the time when you get that money back.So what happens is that at that time your amounts real purchasing ability may reduce.One of the another side is that this kind of interest rate will help against the increase in inflation in the upcoming time.

-- The future of interest rate is the upcoming contracts with an primary device that gives the interest.And it is also known as the contract among the consumer and supplier allowing for the future distribution of interest bearing asset.This also helps the consumer and the supplier to set in the cost of interest having benefit for a upcoming date.

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