Bonds

The Factors that Affect Interest

The amount of interest is affected by two primary parameters: Time and Risk.

 Time: The shorter the time period for which money is used, then the smaller the amount of interest paid (assuming that this transaction represents a loan). In other words, the interest for a period of one week will be less than the interest for a period of 20 years.  .

Risk: The interest rate also reflects an assessment of the probability of the money being repaid. This means that for a riskier borrower a higher interest rate will be required for the money loaned.  This is because the borrower’s ability to repay is deemed to be lower, or because the loan is designated for a riskier investment, or because the loan is not backed by suitable guarantee. Since the probability of having the money repaid is lower, then a higher "user’s fee" is assessed.

The Factors that Affect Interest579The Factors that Affect Interest