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What are the components of an interest rate? Why is it important for accountants to understand...

What are the components of an interest rate? Why is it important for accountants to understand these components?

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Answer #1

Below are the generally components in interest rate :

  • Pure rate of interest— Interest charged without taking into account inflation and credit risk.
  • Expected inflation rate of interest—Lenders recognize that in an inflationary economy, they are being paid back with less valuable dollars. As a result, they increase their interest rate to compensate for this loss in purchasing power. When inflationary expectations are high, interest
  • Credit Risk:This the risk of non-payments, needs to be taken,depending upon its financial stability, profitability, etc. can have a low or high credit risk

Accountants must have knowledge about these components because these components are essential in identifying an appropriate interest rate for a given company or investor at any given moment

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