Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. It is distinct from a fee which the borrower may pay some third party, it is distinct from dividend, paid by a company to its shareholders from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs. For example, a customer would pay interest to borrow from a bank, so they pay the bank an amount, more than the amount they borrowed. In the case of savings, the customer is the lender, the bank plays the role of the borrower. Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise; the rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent.
Compound interest means. Due to compounding, the total amount of debt grows exponentially, its mathematical study led to the discovery of the number e. In practice, interest is most calculated on a daily, monthly, or yearly basis, its impact is influenced by its compounding rate. According to historian Paul Johnson, the lending of "food money" was commonplace in Middle Eastern civilizations as early as 5000 BC; the argument that acquired seeds and animals could reproduce themselves was used to justify interest, but ancient Jewish religious prohibitions against usury represented a "different view". The first written evidence of compound interest dates 2400 BC; the annual interest rate was 20%. Compound interest was important for urbanization. While the traditional Middle Eastern views on interest was the result of the urbanized, economically developed character of the societies that produced them, the new Jewish prohibition on interest showed a pastoral, tribal influence. In the early 2nd millennium BC, since silver used in exchange for livestock or grain could not multiply of its own, the Laws of Eshnunna instituted a legal interest rate on deposits of dowry.
Early Muslims called this riba, translated today as the charging of interest. The First Council of Nicaea, in 325, forbade clergy from engaging in usury, defined as lending on interest above 1 percent per month. Ninth century ecumenical councils applied this regulation to the laity. Catholic Church opposition to interest hardened in the era of scholastics, when defending it was considered a heresy. St. Thomas Aquinas, the leading theologian of the Catholic Church, argued that the charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. In the medieval economy, loans were a consequence of necessity and, under those conditions, it was considered morally reproachable to charge interest, it was considered morally dubious, since no goods were produced through the lending of money, thus it should not be compensated, unlike other activities with direct physical output such as blacksmithing or farming. For the same reason, interest has been looked down upon in Islamic civilization, with all scholars agreeing that the Qur'an explicitly forbids charging interest.
Medieval jurists developed several financial instruments to encourage responsible lending and circumvent prohibitions on usury, such as the Contractum trinius. In the Renaissance era, greater mobility of people facilitated an increase in commerce and the appearance of appropriate conditions for entrepreneurs to start new, lucrative businesses. Given that borrowed money was no longer for consumption but for production as well, interest was no longer viewed in the same manner; the first attempt to control interest rates through manipulation of the money supply was made by the Banque de France in 1847. The latter half of the 20th century saw the rise of interest-free Islamic banking and finance, a movement that applies Islamic law to financial institutions and the economy; some countries, including Iran and Pakistan, have taken steps to eradicate interest from their financial systems. Rather than charging interest, the interest-free lender shares the risk by investing as a partner in profit loss sharing scheme, because predetermined loan repayment as interest is prohibited, as well as making money out of money is unacceptable.
All financial transactions must be asset-backed and it does not charge any interest or fee for the service of lending. In economics, the rate of interest is the price of credit, it plays the role of the cost of capital. In a free market economy, interest rates are subject to the law of supply and demand of the money supply, one explanation of the tendency of interest rates to be greater than zero is the scarcity of loanable funds. Over centuries, various schools of thought have developed explanations of interest and interest rates; the School of Salamanca justified paying interest in terms of the benefit to the borrower, interest received by the lender in terms of a premium for the risk of default. In the sixteenth century, Martín de Azpilcueta applied a time preference argument: it is p
In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and finance, cash is current assets comprising currency or currency equivalents that can be accessed or near-immediately. Cash is seen either as a reserve for payments, in case of a structural or incidental negative cash flow or as a way to avoid a downturn on financial markets; the English word "cash" meant "money box", came to have a secondary meaning "money". This secondary usage became the sole meaning in the 18th century; the word "cash" derives from the Middle French caisse, which derives from the Old Italian cassa, from the Latin capsa. The root is unrelated to the concept of "cash" in British India, which meant "Indian monetary system", derived from the Kannada kaasu and Tamil kasu, Sanskrit karsha or Karshapana and Sinhalese kasi."To cash", the verbalization of the noun, means "to convert to cash", as in the expression "to cash a cheque". In Western Europe, after the fall of the Western Roman Empire, silver jewelry and hacksilver were for centuries the only form of money, until Venetian merchants started using silver bars for large transactions in the early Middle Ages.
In a separate development, Venetian merchants started using paper bills, instructing their banker to make payments. Similar marked silver bars were in use in lands where the Venetian merchants had established representative offices; the Byzantine Empire and several states in the Balkan area and Kievan Rus used marked silver bars for large payments. As the world economy developed and silver supplies increased, in particular after the colonization of South America, coins became larger and a standard coin for international payment developed from the 15th century: the Spanish and Spanish colonial coin of 8 reales, its counterpart in gold was the Venetian ducat. Coin types would compete for markets. By conquering foreign markets, the issuing rulers would enjoy extra income from seigniorage. Successful coin types of high nobility would be copied by lower nobility for seigniorage. Imitations were of a lower weight, undermining the popularity of the original; as feudal states coalesced into kingdoms, imitation of silver types abated, but gold coins, in particular the gold ducat and the gold florin were still issued as trade coins: coins without a fixed value, going by weight.
Colonial powers sought to take away market share from Spain by issuing trade coin equivalents of silver Spanish coins, without much success. In the early part of the 17th century, English East India Company coins were minted in England and shipped to the East. In England over time the word cash was adopted from Sanskrit कर्ष karsa, a weight of gold or silver but akin to the Old Persian karsha, unit of weight. East India Company coinage had both Urdu and English writing on it, to facilitate its use within trade. In 1671 the directors of the East India Company ordered a mint to be established at Bombay, known as Bombain. In 1677 this was sanctioned by the Crown, the coins, having received royal sanction, were struck as silver reupees. At about this time coins were being produced for the East India Company at the Madras mint; the currency at the company’s Bombay and Bengal administrative regions was the rupee. At Madras, the company's accounts were reckoned in pagodas, fanams and cash; this system was maintained until 1818 when the rupee was adopted as the unit of currency for the company's operations, the relation between the two systems being 1 pagoda = 3-91 rupees and 1 rupee = 12 fanams.
Meanwhile, paper money had been developed. At first, it was thought of for emergency issues, hence were most popular in the colonies of European powers. In the 18th century, important paper issues were made in colonies such as Ceylon and the bordering colonies of Essequibo and Berbice. John Law did pioneering work on banknotes with the Banque Royale. However, the relation between money supply and inflation was still imperfectly understood and the bank went under, while its notes became worthless when they were over-issued; the lessons learned were applied to the Bank of England, which played a crucial role in financing Wellington's Peninsular war against French troops, hamstrung by a metallic Franc de Germinal. The ability to create paper money made nation-states responsible for the management of inflation, through control of the money supply, it made a direct relation between the metal of the coin and its denomination superfluous. From 1816, coins became token money, though some large silver and gold coins remained standard coins until 1927.
The World War I saw standard coins disappear to a large extent. Afterwards, standard gold coins British sovereigns, would still be used in colonies and less developed economies and silver Maria Theresa thalers dated 1780 would be struck as trade coins for countries in East Asia until 1946 and later locally. Cash has now become a small part of the money supply, its remaining role is to provide a form of currency storage and payment for those who do not wish to take part in other systems, make small payments conveniently and promptly, though this latter role is being replaced more and more by electronic payment systems. Research has found that the demand for cash decreases as debit card usage increases because merchants need to make less change for customer purchases. Cash is increasing in circulation; the value of the United States dollar in circulation
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, the length of time over which it is lent, deposited or borrowed, it is defined as the proportion of an amount loaned which a lender charges as interest to the borrower expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account; the annual interest rate is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are annualised. Interest rates vary according to: the government's directives to the central bank to accomplish the government's goals the currency of the principal sum lent or borrowed the term to maturity of the investment the perceived default probability of the borrower supply and demand in the marketas well as other factors.
A company borrows capital from a bank to buy assets for its business. In return, the bank charges the company interest. Base rate refers to the annualized rate offered on overnight deposits by the central bank or other monetary authority. Annual percentage rate and effective annual rate or annual equivalent rate are used to help consumers compare products with different payment structures on a common basis. A discount rate is applied to calculate present value. For an interest-bearing security, coupon rate is the ratio of the annual coupon amount per unit of par value, whereas current yield is the ratio of the annual coupon divided by its current market price. Yield to maturity is a bond's expected internal rate of return, assuming it will be held to maturity, that is, the discount rate which equates all remaining cash flows to the investor with the current market price. Interest rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment and unemployment.
The central banks of countries tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. In developed economies, interest-rate adjustments are thus made to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum. In the past two centuries, interest rates have been variously set either by national governments or central banks. For example, the Federal Reserve federal funds rate in the United States has varied between about 0.25% and 19% from 1954 to 2008, while the Bank of England base rate varied between 0.5% and 15% from 1989 to 2009, Germany experienced rates close to 90% in the 1920s down to about 2% in the 2000s. During an attempt to tackle spiraling hyperinflation in 2007, the Central Bank of Zimbabwe increased interest rates for borrowing to 800%.
The interest rates on prime credits in the late 1970s and early 1980s were far higher than had been recorded – higher than previous US peaks since 1800, than British peaks since 1700, or than Dutch peaks since 1600. Before modern capital markets, there have been some accounts that savings deposits could achieve an annual return of at least 25% and up to as high as 50%. Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation; the quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates. Deferred consumption: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods in a free market there will be a positive interest rate. Inflationary expectations: Most economies exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now.
The borrower needs to compensate the lender for this. Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments compete for funds. Risks of investment: There is always a risk that the borrower will go bankrupt, die, or otherwise default on the loan; this means that a lender charges a risk premium to ensure that, across his investments, he is compensated for those that fail. Liquidity preference: People prefer to have their resources available in a form that can be exchanged, rather than a form that takes time to realize. Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss. Banks: Banks can tend to change the interest rate to either slow down or speed up economy growth; this involves either raising interest rates to slow the economy down, or lowering interest rates to promote economic growth.
Economy: Interest rates can fluctuate accordin