Before talking about the factors that affect the interest rate both in companies and in the market, it should be clear that the interest rate reflects the percentage of the amount of money used through a credit, loan or operation that was carried out to that is paid, that is, it represents the price of the use of the borrowed money. You also have to know that there is a difference between interest rate and discount.
In a few words, it is the amount of money reflected in percentage that a debtor must pay to the person who lends, in this case it can be a financial institution. Therefore, it must be taken into account that the interest rate represents a balance between risk and inflation. In addition, it serves as a forecast for expenses and fluctuations in the market.
The interest rate percentage is determined based on various elements. That is why it is very important for companies to know the current value of the indicators, since it will affect them directly, positively or negatively. It is also important to know what are the factors that affect interest rates for companies and the market?
Regarding financial institutions and the interest rate and why they are charged, it will depend directly on the country’s central bank, which is in charge of defining the interest to maintain a balance between supply and demand according to consumption. The time used to express the interest rate is one year, but it can also be detailed in less time.
It should be noted that there are two types of interest, one is the simple one that corresponds to a single amount of money for the entire loan and the other is the compound that is calculated based on the time for which the credit is granted, either annual, monthly, weekly or daily.
How are interest rates affected in companies and the market?
It is necessary to know that there are elements that influence when calculating the interest rate, such as: the amount of money borrowed, the type of interest rate chosen, the duration of the credit and of course what type of loan is requested. In addition, there are different factors that affect interest rates for companies and the market that cause it to increase.
In this sense, the factors that affect the interest rate are usually; inflation, exchange rate, investments and financial analysis in a company. In addition, it should be noted that for companies the interest rate expresses the profitability of investing or saving capital funds.
Likewise, interest rates influence the market, that is, if there is a low rate, it helps economic growth, because it increases the demand for products. On the other hand, if the interest rate is high, it will be able to curb inflation, since consumption tends to fall at the same time that the cost of debts increases.
Factors that directly affect interest rates
- Economic growth, which happens when companies are willing to generate more projects or undertake and therefore are willing to apply for a loan.
- Exchange rate, this tends to be a reference base for commercial transactions.
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Changes in inflation that influence the amount of expenses; therefore these will influence the amount of money saved and the amount to borrow.
- Budget deficits that occur when central banks carry out fiscal policies, since the result will be more expenses than income, then a budget deficit will occur.
- The risk, financial entities can increase the interest rate if they consider that investing money in a project implies greater risk than others.
