An interest rate is the cost of borrowing or the gain from lending, usually expressed as an annual percentage rate; it is generally calculated by dividing the interest amount by the principal amount.
Interest rates change with factors such as supply and demand for money, inflation, and central bank policies.
- Interest is the income earned from lending or investing a sum of money, i.e., the capital or principal.
- The interest rate will be defined as the amount of interest earned for the period concerned per unit of currency invested at the beginning. It is conventionally quoted as a percentage rate per annum.
The ability to work with interest calculations is of fundamental importance to investment performance and anyone in finance. First, we will look at market conventions for quoting interest and how it is computed during various investment periods.