Money. Credit. Banks. Loan interest (interest income) and interest rate (lecture notes)

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Money. Credit. Banks. Loan interest (interest income) and interest rate (lecture notes)

Lecture notes, cheat sheets

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Loan interest (interest income) and interest rate.

Loan % (interest income) - monetary reward of the creditor for granting the credit. It is the loan price (fee) that the borrower owes to the lender for the loan. It characterizes the distribution of income and the risks borne by lenders and borrowers when lending.

Interest rate - the ratio of interest income to the amount of the loan.

34. Determination of the market rate of interest

The market interest rate is formed:

1) as a result of the interaction of supply and demand in the credit market, 2) with the help of the bond market.

Market interest rate and credit market.

Lenders' decisions depend on changes in interest rates in the credit market.

Market interest rate and bond market.

The higher the price of bonds, the less buyers want to buy them and the more sellers want to offer them. The price of bonds changes in inverse relation to the change in the % rate. Therefore, the volume of demand for bonds is in direct proportion, and their supply is inversely related to the interest rate.

The main factors of demand for credit:

1.Expected rate of return (company's profit increases => investment and demand for credit increase).

2.expected inflation (with rising inflation and unchanged nominal rates, real interest rates decrease => growth in demand for credit).

3. volume of state. debt (government borrowing can be so large for any value of% rates that it will become the main determinant of the credit market).

Credit supply factors are determined by:

1. the level of well-being (its growth leads to an increase in the supply of credit).

2. the expected return on assets (with a future increase in interest rates and a decrease in bond yields, the loan supply decreases, with a possible future increase in the price of shares and assets, the loan supply decreases). Relationship with expected inflation rates.

3.risk (in an uncertain situation with a future change in the percentage rate due to inflation, creditors will increase the percentage).

4.liquidity (liquidity of bills, bonds is growing => loan supply is growing).

When demand for credit exceeds supply, the interest rate rises. Changes in the volume of lending depend on the degree of convergence between the expectations of lenders and borrowers about future inflation rates. Demand goes up => interest rate goes up, supply goes up => interest rate goes down.

Within the theory of liquidity preference, the level of nominal interest rates depends on income, price level and money supply.

The volume of supply depends on the monetary policy of the Central Bank and changes in the price level.

Author: Shevchuk D.A.

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