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It goes without saying, that interest rates influence our decisions, and affect many activities in our lives. Interest rates can be expressed as a percentage of the amount borrowed or saved. People always try to be well-informed about changes in economy and finance. They say that it helps them to make better decisions about their personal finance.
It is evident that interest rates affected the standards of our life such as mortgages, savings and investments, buying a car and paying taxes. The world of interest rates is not easy to understand. It includes individuals pay interest, consumer loans and credit card balances. Individuals have interest rates added to their savings. They are guaranteed with investment certificates (GICs), bonds, etc. ; and are paid by financial institutions.
Businesses have two ways for their development. They can either borrow money (debt) or allow others to invest their money into it, issuing stocks or establishing partnerships. As savers people want to have good return of their savings; but as borrowers they want to have the lowest possible interest rates. Interest rates influence borrowers and savers different ways. But there are several questions that affected both. The answers take into account personal situation as well as broader economic forces.
As a rule certain facts should be taken into consideration such as: the terms of the loan; the amount of borrowing and reason for the loan; risk factors for the lender; the prevailing interest rates in the economy and marketplace; and expected inflation. The Federal Reserve Bank is an organization that influence the nations monetary and credit conditions in the economy. Employment, stable prices, and long-term interest rates are depended on the policy of the Bank. From 2001 interest rates in the U. S.
have been lowered 13 times by the Federal Reserve Bank. Since 2004, it tries to raise the interest rates 17 straight times and keep them unchangeable. These actions have an important bearing on the interest rate people pay. Interest rates are divided on short and long-term loans.
Short-term loans as a rule are easier to pay; and they have lower interest rates. It is easy to predict future market conditions such as inflation, changes of interest rates. As a rule people take short-long loans for personal needs such as buying a car etc. For running a business, long-term loans are taken.
They are more risky, because it is difficult to predict the direction of future economic conditions. They should be protected against rising interest rates; otherwise they will have to pay more and can lose a lot of money. The higher the rate of interest, the more the risk is. The other risk is security. To protect credit cards lenders must charge a higher interest rate.
Inflation hurts the economy greatly. It means that for the same amount of money fewer goods can be bought. It is evident that companies' cost of capital is reduced as well as the purchasing power of money. Individuals and companies cannot influence these factors.
But there are some factors that depend on personal experiences with borrowing. The debtor is given a debt repayment program with monthly payments. There are a lot of ways to save or invest money: Guaranteed Investment Certificates (GICs), mutual funds, stocks etc. And there are some factors that influence the return or amount of interest that will be returned. The factors are: the effects of compounding, the inflation rate, and tax treatment.
Any investment will depend on interest rates. The lower interest rates, the smaller future income will be. Inflation also influences investments. The facts should be taken into account, and the form of future investment will depend on it.
It is known that stock market and the price of bonds, as well as real estate always rise when interest rates fall; and vise verse. During the past few years interest rates have dropped. And they are expected to fall in future. Low inflation and improve public finances influence the changes. Inflation is rather low; and there is no need to pay compensation to investors.
Most of all, that the federal government does not look for any additional money with the purpose to finance its spending activities. By the way, the state of the global economy influences the interest rate environment. Interest rate falls if the global economy is stable and world interest rates decline. It should be pointed that in developing countries interest rates are rather high; and there is a risk of uncertainty if you want to invest money. Bibliography: Rabbit, Gary. (1998). Building a Better Understanding: "Interest Rates and the Economy." Canadian Bankers Association.
Toronto, March, 1998.
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Research essay sample on Federal Reserve Bank Lower Interest Rates
