Interest is the payment of the borrower or depositary financial institution to the lender or depositor of the above sum of the principal amount (ie, the amount borrowed), to a certain extent. This is different from the cost that the borrower can pay the creditor or some third party. This also differs from dividends paid by the company to the shareholders (owners) of profit or reserves, but not to some extent previously decided, not pro rata as part of prizes gained by entrepreneurs who take risks when the revenues exceeded total cost.
For example, a customer usually pays interest to borrow from a bank, so they pay the bank an amount more than the amount they borrow; or customers can earn interest on their savings, so they can attract more than they initially store. In the case of savings, the customer is the lender, and the bank plays the role of the borrower.
Interest differs from profit, in interest earned by the lender, while profit is received by the owner of the asset, investment or company. (Interest can be part or overall return on investment, but the two concepts differ from each other from an accounting perspective.)
The interest rate is equal to the amount of interest paid or received over a certain period divided by the principal amount of the loan or loan (usually expressed as a percentage).
Flowering interest means that interest is earned on the previous interest in addition to the principal. Because of the merger, the total amount of debt grows exponentially, and its mathematical research leads to the discovery of the number e . In practice, interest is most often calculated daily, monthly, or yearly, and the impact is greatly influenced by the rate of incorporation.
Video Interest
History
According to historian Paul Johnson, borrowing "food money" is commonplace in Middle Eastern civilizations as early as 5000 BC. The arguments obtained by seeds and animals can reproduce themselves are used to justify flowers, but the ancient Jewish religion's prohibition against usury represents "a different view". While the traditional Middle Eastern view on interest is the result of the character of urbanization, the economically developed society that produces them, a new Jewish ban on interest indicates influence, tribal pastoralism. At the beginning of the second millennium BC, since silver used in exchange for livestock or grain can not breed on its own, the Law of Eshnunna establishes the interest rate of the law, especially on marriage deposits. The early Moslems called this usury , which is translated today as the imposition of interest.
The First Council of Nicea, in 325, prohibited priests from engaging in usury defined as loans with interest above 1 percent per month (12.7% APR). The ninth-century ecumenical council applied this rule to the laity. The Catholic Church's opposition to hardened interest in the scholastic era, when even defending it is considered a heretic. St. Thomas Aquinas, the eminent theologian of the Catholic Church, argues that the imposition of interest is wrong because the amount is "double filling", charging for both things and the use of it.
In a medieval economy, borrowing is entirely a consequence of need (poor harvest, fire at work) and, under such conditions, it is considered morally reproached to wear flowers. It is also considered morally doubtful, since no goods are generated through borrowing money, and therefore should not be compensated, unlike other activities with direct physical output such as a blacksmith or farm. For the same reason, interest is often seen as low in Islamic civilization, with almost all scholars agreeing that the Qur'an explicitly prohibits the charging of flowers.
Medieval experts developed several financial instruments to encourage responsible borrowing and avoid a ban on usury, such as Trinius Contractum.
In the Renaissance era, greater mobility of people facilitated the promotion of trade and the emergence of suitable conditions for entrepreneurs to start a lucrative new business. Given that borrowed money is no longer just for consumption but for production as well, interest is no longer seen in the same way.
The first attempt to control interest rates through the manipulation of money supply was made by Banque de France in 1847.
Islamic Finance
The second half of the 20th century saw the emergence of flower-free Islamic banking and finance, a movement that applies Islamic law to financial and economic institutions. Several countries, including Iran, Sudan, and Pakistan, have taken steps to remove interest from their financial systems. Rather than withdrawing interest, interest-free lenders share the risk by investing as partners in a loss-sharing scheme, since pre-paid loan payments as interest are prohibited, as well as earning money from money is unacceptable. All financial transactions should be backed by assets and do not charge any interest or fees for lending services.
Maps Interest
Economy
In the economy, the interest rate is the credit price, and it plays the role of capital costs. In a free-market economy, interest rates are subject to the law of supply and demand for money supply, and one explanation of a trend rate of interest that is generally greater than zero is the scarcity of borrowed funds.
Over the centuries, various schools of thought have developed explanations of interest and interest rates. The School of Salamanca justifies interest payments in terms of benefits to the borrower, and the interest earned by the lender in the event of a premium for default risk. In the sixteenth century, MartÃÆ'n de Azpilcueta applied the time preference argument: it is better to accept the goods given now than in the future. Thus, interest is compensated for when the lender forgives the benefits of spending money.
As to the question of why the interest rate is usually greater than zero, in 1770, the French economist Anne-Robert-Jacques Turgot, Baron de Laune proposed the theory of fructification. By applying the opportunity cost argument, comparing the loan rate with the rate of return of agricultural land, and the mathematical argument, applying the formula for its value to the plantation, he argues that the value of the land will rise indefinitely, as the interest rate is close to zero. In order for the land value to remain positive and limited, the interest rate remains above zero.
Adam Smith, Carl Menger, and Frà © ncia Bastiat also put forward the theory of interest rates. At the end of the 19th century, Swedish economist Knut Wicksell in 1898 Flowers and Prices outlined a comprehensive theory of economic crisis based on the difference between natural and nominal interest rates. In the 1930s, Wicksell's approach was perfected by Bertil Ohlin and Dennis Robertson and was known as the lending fund theory. Other important interest-rate theories of the period were Irving Fisher and John Maynard Keynes.
Interest calculation
Simple interest
Simple interest is only calculated on the principal amount, or on the part of the remaining principal amount. This does not include compounding effects. Simple interest can be applied over a period of time other than one year, for example, every month.
Bunga sederhana dihitung berdasarkan rumus berikut:
Where
- r is a simple annual interest rate
- B is the beginning balance
- m is the number of elapsed time periods and
Misalnya, bayangkan bahwa pemegang card credit to self-credit balance $ 2500 dan bahwa tingkat bunga tahunan sederhana adalah 12,99% per tahun , diterapkan setiap bulan, sehingga frekuensi penerapan bunga adalah 12 per tahun. Lebih dari satu bulan,
interest matured (rounded to the nearest penny).
Bunga sederhana diterapkan selama 3 bulan
Jika pemegang kartu hanya membayar bunga pada setiap akhir dari 3 bulan, jumlah total bunga yang dibayarkan
which is a simple interest that is applied for 3 months, as calculated above. (A one-cent difference appears to round up to the nearest penny.)
Flowering interest
Compound interest includes interest earned from previously accumulated interest.
Compare for example bonds that pay 6 percent twice a year (ie, 3 percent coupons twice a year) with a certificate of deposit (GIC) that pays 6 percent interest annually. Total interest payments are $ 6 per face value of $ 100 in both cases, but the bi-annual bondholders receive half of $ 6 per year after just 6 months (preference time), and also have the opportunity to reinvest the first $ 3 coupon payment after 6 months first, and earn additional interest.
For example, suppose an investor buys $ 10,000 face value from US dollar bonds, who pay coupons twice a year, and that the simple annual coupon rate of bonds is 6 percent per year. This means that every 6 months, the issuer pays the bondholders a coupon of 3 dollars per 100 dollars face value. At the end of 6 months, the issuer pays the holder:
Assuming the bond market price is 100, so it is traded at face value, suppose further that the holder immediately reinvest the coupon by spending it on the other $ 300 value of the bond. In total, investors therefore now hold:
dan mendapatkan kupon pada akhir 6 bulan ke depan:
dan total yang diperoleh investor:
Rumus untuk tingkat bunga gabungan tahunan yang setara adalah:
Where
- r is the simple annual interest rate
- n is the frequency of application of interest
Misalnya, dalam kasus tingkat tahunan sederhana 6%, tingkat senyawa setara tahunan adalah:
Install disk
- T-Bills AS dan Kanada (hutang Pemerintah jangka pendek) memiliki perhitungan yang berbeda untuk bunga. Bunga mereka dihitung sebagai (100Ã, - P )/ P di mana P adalah harga yang dibayarkan. Daripada menormalkannya menjadi satu tahun, bunga itu diprorata oleh jumlah hari t : (365/ t ) Ã, Â · 100. (Lihat juga: Konvensi hitungan hari). Perhitungan total adalah ((100Ã, - P )/ P ) Ã, Â · ((365/ t ) Ã, Â · 100). Ini setara dengan menghitung harga dengan process yang disebut disc dengan tingkat bunga sederhana.
Aturan 78s
In the days before the electronic computing power was widely available, consumer loans at the average rate in the United States would be rewarded using the Rule 78s method, or "number of digits". (The number of integers from 1 to 12 is 78.) This technique requires only simple calculations.
Payments remain constant throughout the loan term; however, payments are allocated to interest in an increasingly small amount. In a one-year loan, in the first month, 12/78 all interest payable during the lifetime of the loan is due; in the second month, 11/78; progress to the twelfth month where only 1/78 of all interest is due. The practical effect of Rule 78 is to make early repayments of longer-term loans more expensive. For a one-year loan, approximately 3/4 of all interest due is collected in the sixth month, and the principal payments will cause the effective interest rate to be much higher than the APY used to calculate payments.
In 1992, the United States banned the use of "Rule 78" interest in respect of mortgage refinancing and other consumer loans for five years within a specified period. Certain other jurisdictions have banned the adoption of Rule 78 in certain types of loans, particularly consumer loans.
Rule 72
To estimate how long it will take to multiply at a certain interest rate, that is, for accumulated interest accruing to or exceeding the initial deposit, divide 72 by the interest rate percentage. For example, compounding at an annual interest rate of 6 percent, would require 72/6 = 12 years for money to be doubled.
The rule provides a good indication for interest rates up to 10%.
Dalam kasus tingkat bunga 18 persen, aturan 72 memprediksi bahwa uang akan berlipat ganda setelah 72/18 = 4 tahun.
Dalam kasus tingkat bunga 24 persen, aturan memprediksi bahwa uang akan berlipat ganda setelah 72/24 = 3 tahun.
Suku bunga pasar
There is a market for investments (which include money markets, bond markets, as well as retail financial institutions such as banks) setting interest rates. Each specific debt takes into account the following factors in determining the interest rate:
Deferred opportunity and consumption costs
Opportunity costs include any other use that can be used to enter money, including lending to others, investing elsewhere, holding cash, or spending money.
Attracting interest equals inflation keeping the lender's purchasing power, but not compensating for the time value of money in real terms. Lenders may prefer to invest in other products instead of consuming. The advantage they may gain from competing investments is a factor in determining the interest rate they are asking for.
Inflation
Because the lender is delaying consumption, they will expect , as a minimum, to recover enough to pay for the increased cost of goods due to inflation. Since future inflation is unknown, there are three ways this can be achieved:
- Filling X% interest "plus inflation" Many governments issue "real-return" or "inflation indexed" bonds. The principal amount or interest payments continue to increase with the rate of inflation. See the discussion with real interest rates.
- Determine the expected "inflation rate". This still lets lenders exposed to inflation risk "unexpectedly".
- Let the interest rate change periodically. While the "fixed rate" remains the same throughout the life of the debt, the "variable" or "floating" interest rate can be reset. There is a derivative product that allows for hedging and swap between the two.
But interest rates are set by the market, and it often happens that they are not enough to compensate for inflation: for example when inflation is high during, for example, the oil crisis; and current (2011) when real results on many government stocks are negatively related to inflation.
Default
There is always the risk that the borrower will go bankrupt, run away or fail to pay the loan. Risk premiums try to measure the integrity of the borrower, the risk of the company is successful, and the security of the promised collateral. For example, loans to developing countries have a higher risk premium than loans to the US government due to differences in creditworthiness. The line of credit operations for a business will have a higher rate than a mortgage loan.
Business credit worthiness is measured by bond rating services and individual credit scores by credit bureaus. Individual debt risk may have a high probability deviation. Lenders may want to cover their maximum risk, but lenders with a debt portfolio can lower the risk premium to cover only the most likely outcome.
Interest rate composition
In the economy, interest is considered a credit price, therefore, also subject to distortions due to inflation. The nominal interest rate, which refers to the price before adjustment to inflation, is visible to the consumer (ie, the interest marked in the loan contract, credit card statement, etc.). The nominal interest consists of the real interest rate plus inflation, among other factors. The approximate formula for nominal interest is:
Where
- i is the nominal interest rate
- r is the real interest rate
- and ? is inflation.
However, not all borrowers and lenders have access to the same interest rate, even if they are exposed to the same inflation. Furthermore, future inflation expectations vary, so that the forward-looking interest rate can not depend on a single real interest rate plus an expected rate of inflation.
Interest rates also depend on credit quality or default risk. The government is usually a reliable debtor, and the government securities interest rate is usually lower than the interest rate available to other borrowers.
Persamaan:
relates the expectation of inflation and credit risk with nominal and expected real interest rates, during the loan term, where
- i is the nominal interest applied
- r is the expected real interest
- ? is the expected inflation and
- c is a distributed result according to the perceived credit risk.
Default flowers
Default interest is the interest rate to be paid by the borrower after breach of the credit agreement.
Default interest is usually much higher than the original interest rate because it reflects the aggravation in the borrower's financial risk. The default interest compensates the lender for additional risk.
From a borrower's perspective, this means failure to make regular payments for one or two payment periods or failure to pay taxes or insurance premiums for loan guarantees will lead to much higher interest for the rest of the loan term.
Banks tend to add default interest to loan agreements to separate between different scenarios.
In some jurisdictions, the default interest clause has no legal force compared to public policy.
Term
Shorter terms often have less risk than default and inflation exposure because the near future is more predictable. Under these circumstances, short-term interest rates are lower than long-term interest rates (upward sloping yield curves).
Government intervention
Interest rates are generally determined by the market, but government intervention - usually by the central bank - may greatly affect short-term interest rates, and is one of the main tools of monetary policy. The central bank offers to borrow (or lend) large sums of money at the rate they specify (sometimes this is the money they create ex nihilo, that is, printed) that has a major influence on supply and demand and therefore on market rates.
Open market operations in the United States
The Federal Reserve (Fed) implements monetary policy largely by targeting federal funds levels. This is the rate banks charge each other for federal funds overnight loans. The federal funds are reserves held by banks in the Fed.
Open market operations are one tool in monetary policy adopted by the Federal Reserve to control short-term interest rates. Using the power to buy and sell securities, the Open Market Desk at the Federal Reserve Bank of New York can supply the market with dollars by buying US Treasury notes, increasing the amount of state money. By increasing the money supply or Aggregate Supply of Funding (ASF), interest rates will fall as excess dollars of banks will end up in their reserves. Excess reserves can be lent in the Fed fund market to other banks, thereby lowering rates.
Interest rates and credit risk
It is increasingly recognized that during the business cycle, interest rates and credit risk are closely intertwined. The Jarrow-Turnbull model is the first model of credit risk that explicitly has a random interest rate at its core. Lando (2004), Darrell Duffie and Singleton (2003), and van Deventer and Imai (2003) discussed interest rates when the issuer of interest instruments could default.
Money and inflation
Loans and bonds have some characteristics of money and are included in the money supply.
The national government (provided, of course, that the country has defended its own currency) may affect interest rates and thus supply and demand for such loans, thereby altering the total loans and bonds issued. In general, a higher real interest rate reduces the money supply extensively.
Through the quantity theory of money, an increase in the money supply causes inflation. This means that interest rates can affect future inflation.
Liquidity
Liquidity is the ability to resell assets quickly for a fair value or close to fair value. All others are equal, an investor will want a higher profit from illiquid assets than liquid ones, to compensate for the loss of options to sell them anytime. US government bonds are highly liquid with active secondary markets, while some of the other debts are less liquid. In the mortgage market, the lowest rates are often issued on resale loans as securities loans. Non-traditional loans such as seller financing often carry higher interest rates due to lack of liquidity.
Interest theory
Aristoteles.E2.80.99s_view_of_interest> Aristotle's views of interest
Aristotle and Scholastic argue that it is unfair to claim payment, except as compensation for one's business and sacrifice, and since money is essentially sterile, there is no loss because it is separated from it. Compensation for risk or for loan regulation issues is not always not allowed on this basis.
Development of interest theory during the seventeenth and eighteenth centuries
Nicholas Barbon (c.1640-c.1698) is described as a "mistake" of the view that interest is monetary value, arguing that since money is usually borrowed to buy assets (goods and stock), the interest charged on the loan is the type of lease - "payment for the use of goods ". According to Schumpeter, Barbon's theories were forgotten until the same view was presented by Joseph Massie in 1750.
In 1752 David Hume published his essay "Of money" with interest in "demand for borrowing", "wealth available to supply the demand" and "profit arising from trading". Schumpeter considers Hume's theory to be superior to Ricardo and Mill's theory, but the reference to earnings concentrates on a surprising level on 'trade' rather than on industry.
Turgot brings interesting theories close to his classical form. Industrialis...
... share their profits with capitalists who provide funds ( RÃÆ' Â © flexions , LXXI). The share that goes to the latter is determined like all other prices (LXXV) by the game of supply and demand among borrowers and lenders, so its analysis from the outset is firmly embedded in the general pricing theory.
The classic theory of interest rates
The classical theory is the work of a number of authors, including Turgot, Ricardo, Longfield Mountifort, J. S. Mill, and Irving Fisher. It was strongly criticized by Keynes whose comments continue to make a positive contribution to it.
Mill Theory set the chapter "From the interest rate" in his book "Principles of political economy". He said that interest rates adjust to keep the balance between demand for lending and borrowing. Individuals lend to delay consumption or for the greater amount they will be able to consume in the future because of the interest received. They borrow to anticipate consumption (whose relative desire is reflected in the time value of money), but entrepreneurs also borrow to fund investments and borrow governments for their own reasons. Three sources of demand compete for loans.
For an entrepreneurial loan to be in equilibrium with a loan:
Interest for money... is... governed... by the rate of profit that capital labor can make...
Ricardo and Mill's 'profit' are made more precise with the concept of the marginal efficiency of capital (expression, though not conceptual, is due to Keynes), which can be defined as the annual income that will be generated by an additional increase in capital as a proportion of its cost. Thus the interest rate r in equilibrium will be equal to the marginal efficiency of capital r '. Instead of working with r and r ' as a separate variable, we can assume that they are the same and let a single variable r show their general value.
The investment supply curve i s ( r ) shows how much investment is possible with returns at least r . In a stationary economy it tends to resemble the blue curve in the diagram, with the form of a step arising from the assumption that the odds of investing with the result are greater than r? have been very tired while there are scopes that have not been utilized to invest with lower returns.
The solid red curve in the diagram shows the desired saving rate s (same as demand for investment) as a function r for current income ? Saving is the advantage of being deferred for anticipated consumption, and the demand function is very similar to that given by Keynes (see General Theory), but in classical theory it must be an increased function of r . (Dependence s on revenue y is irrelevant to classic concerns before the development of unemployment theory.) The interest rate is given by the intersection of a solid red demand curve with a blue supply curve. But as long as the vertical supply curve is nearly vertical, changes in income (leading to extreme cases to the damaged red demand curve) will make little difference to the interest rate.
In some cases, the analysis will be less simple. The introduction of new techniques, which lead to demand for new forms of capital, will shift the step to the right and change its shape. Or a sudden increase in the desire to anticipate consumption (perhaps through military spending in times of war) would absorb most of the available loans; the interest rate will increase and the investment will be reduced to the amount that the return is over. This is illustrated by the demand curve of the red dots.
Keynesian Criticism
In the case of exceptional spending in times of war, the government may wish to borrow more than the public would be willing to lend at normal interest rates. If the dashed red curve starts to negative and does not show a tendency to increase with r , then the government will try to buy what the public does not want to sell at any price. Keynes mentions this possibility as a point "which may, perhaps, have warned the classical school that something is wrong" (p.182).
He also stated (on the same page) that the classical theory does not explain the general notion that "an increase in the quantity of money has a tendency to reduce the interest rate, at any rate in the first instance."
Keynes's diagram of the supply curve does not have a step form that can be seen as part of a classical theory. He's that thing
functions used by classical theory... do not give material for interest rate theory; but they could be used to tell us... how much the interest rate should be, if the [income earning] level of work is maintained at a given number.
The classic does not explicitly state the assumption that the supply curve is vertical in steady state, although this belief may be inferred from their discussion of a suspected secular interest rate cut. On the other hand Keynes does not acknowledge that his criticisms require contradictory assumptions as premises. Marshall seems to have shared Keynes's view, perhaps because Ricardo's highly stationary picture of the economy seemed less plausible half a century later.
Then (p.184) Keynes claims that "it involves a circular argument" to
Source of the article : Wikipedia
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