what is "Interest Rates"? and its Kind

If an entrepreneur needs $50,000 to start a bakery, chances are she has to borrow the money. The $50,000 she borrows is the principal amount of the loan. The extra money she pays to borrow the principal over time is the interest.

When there's a lot of money to be lent out, lenders drop their interest rates. When money is tight, however, lenders charge higher rates. One way corporations borrow money is by selling bonds to investors, who act as lenders.

How much should the corporate borrower pay the buyers of the bonds?
How about zero?

Zero percent financing sounds tempting to a borrower. Unfortunately, the buyers of debt securities demand compensation. They're the lenders of the money, and they demand the best interest rate they can receive in return for lending their capital. So, bond issuers pay investors only what they have to pay them. Interest rates, then, are the result of constant spoken and unspoken negotiations going on be¬tween providers of capital and those who would like to borrow it.

There is a several Kind of interest rates:
•    Discount rate: the rate banks pay when borrowing from the Federal Reserve.
•    Fed funds rate: the rate banks charge each other for overnight loans in excess of $1 million. Considered the most volatile rate, subject to daily change.
•    Broker call loan rate: the rate broker-dealers pay when borrowing on behalf of their margin customers.
•    Prime rate: the rate that the most creditworthy corporate customers pay when borrowing through unsecured loans.
•    LIBOR: stands for London Interbank Offered Rate, a benchmark rate that many large international banks charge each other for short-term loans.

The London Interbank Market is where large international banks go to get short-term loans at the most competitive rates possible. The rate mentioned above, LIBOR, is fixed daily by the British Banker's Association and represents an average of the world's most creditworthy banks' interbank deposit rates for large loans with maturities between overnight and one year. LIBOR is the most frequently used benchmark for short-term interest rates.

Creditworthy borrowers might be able to borrow at "LIBOR plus five basis points," while shaky borrowers would have to pay a much higher premium to LIBOR.


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