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Interest rate is basically the profit or revenue from funds lended.
How are interest rates determined: the lender perspective
The logic behind interest rate calculations is pretty straightforward, and it generally boils down to perceived risk. When a lender gives you money in the form of a loan, they’re essentially betting that you’ll pay that money back. If it is a good bet that you’ll pay the money back, lenders are generally willing to accept a smaller rate on the loan. If, on the other hand, the lender believes that there is a relatively good chance that you won’t pay the loan back, they’ll want to charge a higher rate as compensation for accepting the increased risk associated with you as a borrower.
This underlying risk/reward logic isn’t just a factor in lending. It’s actually an important influence in economic systems and consumer decision-making - impacting everything from financial markets to international relations.
So how do lenders determine how much risk they should associate with a given borrower? In most cases, potential factors that lenders evaluate in determining an interest rate for a given borrower ...
Discussion Questions: What is interest rate, and how is it determine?
Answer: Interest rate is the basic price that equates the demand for and supply of loanable funds in the financial market.
The interest rate is determined b...
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