Reasons for different interest rate, Finance Basics

Reasons for Different Interest Rate

Interest rates may differ in different market and market segment since:

i) Size of the loan: Deposits above specific amounts into the bank might attract higher interest rates rather than smaller deposits. Therefore, large borrowers would be charged higher interest rates than small borrowers.

ii) Risks: Higher risk borrowers should pay higher rates on their borrowing to compensate lenders for greater risks included.

iii) The requirement to make a profit in re-lending: as like banks borrow for depositors and charge higher interest or like profit margin whenever they lend to borrowers.

iv) Duration of the lending : The L.T. loans will receive a higher rate of interest than shorter term loans because of the maturity risk premium.

v) International interest rates: This varies from one country to other because of differing rates of inflation and foreign currency exchange rates and government policies on interest rates.

vi) Different kinds of financial assets: Building societies should offer higher yields to depositors to attract those using bonds that have high rate of return.

Posted Date: 1/30/2013 3:20:57 AM | Location : United States

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