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 be 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 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 percentage of the interest rate is determined based on several 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 to companies and the market?
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Regarding financial institutions and the interest rate and why they are charged will depend directly on the country’s central bank, which is the 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 interest rates, 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 annually, 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 length of time of credit and of course what type of loan is requested. In addition, there are different factors that affect interest rates to companies and the market that influence 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 equity funds.
Likewise, interest rates influence the market, that is, if there is a low index, it helps economic growth, because the demand for products increases. On the other hand, if the interest rate is high, it can 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 for that reason they are in the disposition to request a loan.
- Exchange rate, this tends to be a reference base for commercial transactions.
- Changes in inflation that influence the amount of expenses; therefore these will influence the amount of money saved and the amount to borrow.
- Budget deficit that occur when central banks carry out fiscal policies, Since the result will be more expenses than income, then there will be a budget deficit.
- The risk, financial institutions can increase the interest rate if they consider that investing money in a project involves greater risk than others.
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