interest rates

Name
Professor
Course
Date
The interest rate is the amount expressed as a percentage of principle to a borrower from a lender for use of assets or money lent. Interest rates are calculated on an annual basis as the annual percentage rate (APR) (Homer, 2013). Therefore, as a result, banks pay interest on deposits by customers as a way of encouraging people to make deposits. Banks use these deposits from savings or checking accounts to finance loans. The bank charges borrowers with a higher interest than they pay depositors to realize a profit. However, competition among banks for depositors and borrowers results in banks having interest rates in a narrow range of each other (Sylla, 2015).
Interest is applied by the bank to the unpaid portion of a loan or credit card balance and adds up to the outstanding debt. One must pay interest for each month or else have an increase in the outstanding debt even when paying deposits (Swanson, 2014). Banks charge higher interest rates when the chances of the loan getting repaid are lower. This explains the higher interest rates charged on revolving loans like credit cards. Additionally, Borrowers with a low credit score or risky borrowers are also charged with higher interest rates (Bernanke, 2015).
Interest rates are a key determinant of economic growth. Higher interest rates lower the amount of credit available to people, hence slowing consumer demand. Consequently, higher rates encourage saving by increasing the savings rate (Jha, 2011). This reduces capital in the rotation and a reduction in liquidity that slows down the rate of economic growth an interest rate environment which long-term debt instruments result to lower output than short-term instruments of debt result to an inverted yield curve (Bernanke, 2016).

The inverted yield curve is a pointer of economic recession. An inverted yield curve forecasts decrease in interest rates toward the future as long-term bonds are being financed, reducing yield (Malkiel, 2015).
References
Bernanke, B. (2015). Why are interest rates so low? Ben Bernanke’s Blog.
Bernanke, B. (2016). What tools does the fed have left? Part 1: Negative interest rates. Brookings Institution (blog).
Jha, S. (2011). Interest Rate Markets + Web site: A Practical Approach to Fixed Income. Hoboken: John Wiley & Sons.
Malkiel, B. G. (2015). Term structure of interest rates: expectations and behavior patterns. Princeton University Press.
Swanson, E. T., & Williams, J. C. (2014). Measuring the effect of the zero lower bound on medium-and longer-term interest rates. American Economic Review, 104(10), 3154-85.
Sylla, R., & Homer, S. (2013). A history of interest rates. Hoboken, N.J: Wiley.