Question

VY Question 3: (7 Marks) , - 0 1. Discuss the various types of interest rates you know. What is the difference between the term "Interest Rate and the term "Rate of Return" in economic analysis? .......... ..............(2 Marks)

Answer 1

There are several kinds of interest rates . Some of the examples are given below :

a) Simple interest rate : this is most basic kind of interest rate , it is paid only one time and the interest rate is decided before beginning of the term which does not change over the term .

b) Compound interest rate : It is compounded after a specif time gap , interest rate is charged on principal amount and also on the previously earned interest , in this way compounding effect works . Usually seen in case of bank savings accounts , credit cards etc .

c) Fixed and variable interest rates : As the names suggest first one remains fixed on the entire term of loan , variable interest rate changes based on current value interest .

d) Bank rate , discount rate : Interest rates which are charged when inter banking loan exchange occurs .

Interest rate is the external rate on principal money , it is the rate at which money is borrowed from a financial institution or lender . On the other hand rate of return is an internal measure of the return on money invested in a project .

The interest rate depends on the borrowers credit ranking and dependability of the project that requires the loan . While rate of return is the rate at which a project's profit when discounted , becomes equal to upfront or initial investment .