Interest and the Keynesian Liquidity Preference Theory

Interest is a factor income in that it is considered to be payment to or return on capital in the sense that it is payment to those who provide loanable funds, which are used for the purchase of capital assets.  The payment of interest to the providers of loanable funds may be justified on the following grounds:

1. The lender postpones present consumption and enjoyment and interest is paid as persuasion for him/her to make this sacrifice.
2. There is risk of default in that the borrower may fail to pay back and interest is paid as persuasion for the lender to undertake this risk.
3. There is loss of purchasing power due to increases in prices over time, and interest is paid as compensation for this loss.
4. The borrower earns income from the investment, and the tender can justifiably claim a share in that income.