Interest Rate

Definition of Interest Rate

What is an Interest rate?

Interest rates reflect the amount that a creditor charges for borrowing money, or other tradeable assets. The size of an interest rate is generally expressed in terms of a percentage of the amount being borrowed, and the size of the interest rate may vary depending on how high- or low-risk the borrowing party is considered to be. Interest rates are most commonly given on an annual basis, known as the annual percentage rate. Interest rates take into account the projected inflation rate for the lending period. That is to say. If the creditor believes the inflation rate over the coming year will be 3%, he may charge an interest rate of 5% (also known as the nominal rate), so that if the inflation rate causes the value of the amount lent by 3%, the creditor will still see a 2% return on his investment, also known as the expected real interest rate.
Simple interest rate charges a base percentage per year on the amount of money borrowed. A compound interest rate is higher, and is accrued on a monthly basis and factors in not only the principal amount borrowed, but also charges interest for the amount of interest added to the total due at that point. Factors that can affect interest rates include geopolitical events, such as military conflicts, or gas shortages, federal government decisions, such as adjusting the prime lending rate of the federal banks, and supply and demand of a national currency.

How do Interest rates affect forex traders?

Very often. The most successful investors are those who are able to follow closely the interest rates and are aware of how the changes in rates will affect their fixed-income and equity markets. A prime example is when investing in bonds. The bond, or currency pair may yield what seems like a high interest rate, but if the projected inflation rate is also high, an investor may choose not to invest in that bond at the time, or to negotiate different, more favorable terms.

Links related to Interest rate
Bond
Currency Pair
Interest
Yield