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How is the interest rate determined ? We know there are economic and business factors that...

How is the interest rate determined ? We know there are economic and business factors that contribute to this determination.

Identify and discuss the components that make up an interest rate and why it is important to understand these components as an accountant.

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Answer #1

Interest rate represents the cost of funds. They are determined by the Federal Open Market Committee which meets eight times a year.

Interest rates are affected by the supply and demand for credit. A higher demand for funds increases the interest rates. Inflation affects the interest rate levels. Higher the inflation rate higher will be the demand for funds and hence interest rates will increase. The monetary policy affects the interest rate. This is determined by the federal funds rate and the open market transactions of the government. The federal funds rate represents the rate that depository Institutions charge each other for short term loans. Open market transactions represent buying and selling of U.S. securities by which the government regulates the money supply in the economy.

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