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Essay / Research Paper Abstract
This 3-page paper explains some concepts about interest rates -- what they are, why they can differ from one institution to another, from one country to another, and over time. Bibliography lists 3 sources.
Page Count:
3 pages (~225 words per page)
File: D0_MTinterate.rtf
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Unformatted sample text from the term paper:
dominates everything from home mortgage commercials to talking heads on television news shows. But what, exactly, are interest rates? Why do they differ so much between different borrowers, across borders
and even across time? To answer this question, it would first be helpful to determine what, exactly, interest rates are. In its
most basic form, interest is what a lender charges for the use of its money (Investorwords.com, 2007). In other words, when someone borrows money, its not a direct loan at
face value. The lender wants to make sure he or she will receive extra, in case the loan defaults. An interest rate is expressed as an annual percentage of the
principal, and is determined by dividing the amount of interest by the amount of the principal (Investorwords.com, 2007). If a bank, for example, charges $90 in interest on a $1,000
loan, then the interest rate is 90/1,000, or 9% (Investorwords.com, 2007). But what makes determining interest rates so tricky is that interest is computed annually -- while simple interest is
computed annually solely on the principal, compound interest computes the interest on the principal -- and previous interest that has been added to the principal (Columbia Encyclopedia, 2007).
But what causes interest rates to move over time, between institutions and across borders? A great deal depends on what is set by a
particular countrys banking system. In the U.S., this is known as the Federal Reserve Board, or simply the Fed. The Fed can raise or lower the federal funds target rate,
also known as the Fed funds rate, to either tighten the amount of money in the economy, or to loosen it (Franklin Templeton Investments, 2007). Federal funds, by the way,
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