What Is Interest Rate?

Emirex Group | Jan 14, 2021 5:26:48 PM

The interest rate policy is one of the most important and at the same time rather complicated instruments for carrying out financial activities. The basic principles for constructing a scale of interest rates are based on the state of supply and demand for credit resources, storage periods, the size of deposits, inflation rates, etc.

The interest rate is determined by two factors:

  • The different behavior of economic agents, some of whom prefer to accumulate money and then receive benefits, and the other part - to take out loans;
  • The return on investment of loans in various financial instruments.

In almost all countries, interest rate policy is regulated by a certain body. Even though in many market economies the process of setting interest is provided to banks, there is indirect regulation by setting the official rate, quantitative restrictions. However, the cryptocurrency environment is creating new ideas in this area of ​​finance, through the decentralized setting of interest rates, as well as the voting process.

Interest rate definition

Interest rate is a payment that one person (borrower) transfers to another person (lender) for using borrowed funds. The level of interest is determined by the ratio between supply and demand and is expressed in the interest rate, which is the ratio of the interest rate to the amount of the loan. 

When concluding a financial or credit agreement, the parties agree on the amount of the interest rate - this is the ratio of income to the amount of debt, i.e. the relative amount of income for a fixed period. The rate is measured as a percentage in the form of a decimal or a fraction with an accuracy of 1/16 or 1/32.

The time interval to which the interest rate refers is called the accrual period. Interest is either paid to the lender as it accrues, or is added to the amount owed.

The essence of the accrual method is simple interest - interest is calculated over the entire term of the loan on the same amount of capital provided on the loan.

The method of accrual for compound interest is that in the first period, accruals are made on the original loan amount, then it is added to the accrued interest, and interest is accrued on the total amount.

Interest rates can be fixed or variable. In the second case, the base rate and the amount of the markup to it (margin) are indicated as changing over time. The size of the margin is often determined by the term of the transaction and the financial position of the borrower.

How it works

Interest rates make the world go round. In other words, the market is ruled by global interest rates. They are probably the most important factor in determining the perceived value of a currency. Knowing how countries determine their monetary policy, such as interest rate decisions, is a critical thing for any trader to ponder.

One of the biggest influences on interest rate decisions is price stability, or "inflation". Inflation is a steady rise in the prices of goods and services. It is generally accepted that moderate inflation is accompanied by economic growth.

To keep inflation at a comfortable level, banks often raise interest rates, which leads to a decrease in overall growth and a slowdown in inflation. This is because setting high-interest rates tends to force consumers and businesses to borrow less and save more, which constrains economic activity. Loans are becoming more expensive while staying in cash becomes more attractive.

On the other hand, when interest rates come down, consumers and businesses are more likely to take out loans (because lending requirements are simplified), increasing retail and capital spending, thereby helping the economy grow.

The interest rate in Crypto

In the cryptocurrency world, such an opportunity appeared not so long ago, but interested exchanges began to be active in this direction, so it is quite possible to profit from placement at interest rates of Bitcoin or some other cryptocurrency. The interest rate in bitcoins is 1-6% per annum and, accordingly, 4-12% in USDT. However, due to the volatility of the bitcoin rate, the investment activities must be carefully analyzed and planned.

Another interesting new direction is decentralized finance (DeFi). As with traditional finance, DeFi lending rates are ultimately driven by supply and demand. DeFi borrowing demand is high as it is global and innovative. So in the crypto space, there are many opportunities for profit, which is determined by extremely high-interest rates. Traders chasing these opportunities need liquidity and are willing to pay high-interest rates for it. For example, Emiflex offers the highest interest rates on the market with the most profitable annual income of 60.42%.

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