Determination of Interest Rates Essay

relate respects are the buckle underments one makes to some other as the cost of borrowing pecuniary resource. Interest rates should be gibe to different borrowers under the same prevailing economic conditions. Various factors add up into play to determine the absorb rate to be paid by a borrower. This paper explores the factors used in determining the prevailing interest rates. Among the factors used to determine interest rates are trust pure tone, local anaesthetic and world economic and political conditions (Lando 143).In addition, the demand and supply of funds besides determine the interest rates discipline on borrowings. The borrower eer has a feeling that the interests charged are the best deal and that cleanse returns will accrue from the funds borrowed. In the same manner, the lender should in addition feel the interest charged would have the best returns. Credit quality refers to the cap dexterity of investors to pay under a given up economic situation. Int erest rates are charged in direct proportionality to credit quality (Singleton et al 56).Big businesses and government can easily pay for the loans borrowed plus the interests charged. An investor may also compare the opportunity cost of silver over a given period. The economic condition may be in a state of either inflation or deflation, forcing the lender to consider the opportunity cost of funds over a given period. An increase in inflation rate results in an increased rate since the expected inflation rate is also accounted for in the rates set (Sullivan et al 505-506).For instance, if in a situation without inflation, the interest rate is 4%, then this becomes 7% if the inflation rate is 3%. The declining value of positive due to inflation may affect a borrowers ability to pay. This will increase the risks associated with the repayment ability of the borrower. The higher risks are thus included in the interest rate charged. Political subsidies by governments also influence i nterest rates.Governments can lower the interest rates on borrowers by subsidizing certain(prenominal) loans such as college student loans, public trapping loans, and other public work program loans. Conclusion Interest rates, the supererogatory on a borrowed money paid to the lender by the borrower, is decided by many factors. The main factor is the prevailing economic conditions. These could be inflation or deflation. The government may also subsidize certain type of borrowers to motivate them to borrow. The ability of the borrower to pay, the credit quality, is also a brisk determinant of interest rates.