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Presentation

Interest Rates

By Michelle and Temi

objectivEs

loans

What are Interest Rates ?

To put it simply, interest is the price you pay to borrow money – whether that's a student loan, a mortgage or a credit card. When you borrow money, you generally must pay back the original amount you borrowed, plus a certain percentage of the loan amount as interest.

This represents the current interest rate in the United Kingdom as of January 2024

5.25%

Inflation rate at 2% or below

Objective 3

SHigh economic growth

Objective 2

Interest rates as low as possible

Objective 1

If a business/ individual borrows money, they have to pay interest on the loan.– The impact of low interest rates has been helpful.– Base rate:the rate of interest around which a bank structures other interest rates.> Explaining the base rate: if bank of england raises the base rate , all other borrowing / saving rate are likely to move in the same direction and visa versa.> Since 2008, the base rate has been 0.5%.> In the 1980's interest rates were much higher which peaked at 15%.– The use of interest rates help control the economy.– Monetary policy: using changes in the interest rate and money supply to manage the economy.

Uk interest Rates 1984-2014

– Changes in interest rates are likely to affect the overheads of a business.– Interest rates are a part of overhead costs.– If interest rates rise, businesses are likely to have to pay higher interest payments on their borrow E.g., a business may borrow £10k in an overdraft. The annual payments would rise from £600 to £700 if the rate of interest rose from 6 to 7 percent a year.– not all borrowing is at variable rates of interest – variable rates: means the bank and other lenders are free to charge the interest rate on any money borrowed – Many loan businesses are at fixed rates of interest: meaning the bank cannot charge the rate of interest over the agreed term of the loan.– So... a rise in interest wont affect a business overheads with fixed term loans.– But... if a business wanted to take out new loans, it would have to pay the higher interest rate the bank or lender is now charging

EOC

Effects on Cost

Interest Rates

IN

Contextualize your topic

– Changes in interest rates are likely to affect the overheads of a business.– Interest rates are a part of overhead costs.– If interest rates rise, businesses are likely to have to pay higher interest payments on their borrow E.g., a business may borrow £10k in an overdraft. The annual payments would rise from £600 to £700 if the rate of interest rose from 6 to 7 percent a year.– not all borrowing is at variable rates of interest – variable rates: means the bank and other lenders are free to charge the interest rate on any money borrowed – Many loan businesses are at fixed rates of interest: meaning the bank cannot charge the rate of interest over the agreed term of the loan.– So... a rise in interest wont affect a business overheads with fixed term loans.– But... if a business wanted to take out new loans, it would have to pay the higher interest rate the bank or lender is now charging

Effects

+ Info

Paying them off
Investments and saving
Expenses of projects

Effects of Interest Rates on Investment

A rise in interest rates will increase the cost of existing variable rate borrowing.A business can choose to pay off existing loans rather than increase its investment.This will reduce costs and reduce risks associated with borrowing

3. Existing Loans

Businesses can put their funds into saving schemes rather than investing e.g., if interest rates rise from 5 to 8 percent a business may decide to save instead of invest.

2. Saving Attraction

Investment projects are financed through loansA rise in interest increases the cost of borrowing money.When total costs has increased, profitability decreases.This may discourage investment, showing a fall in investments in the economy

1. Loan Costs

Effects of interest rates

4. Exports and Imports.

2. Domestic investment

3. Stock

1. Domestic Consumption

The level of interest affects aggregate demand for goods/ services in the economyAggregate demand:A rise in interest rates will cause a fall in aggregate demand.A fall in interest rates will case a rise in aggregate demand.Businesses are affected by thisIf demand falls, their sales go down because less is being bought.If demand rises, their sales go up because more is being bought.

Demand

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