Introduction
Bank rate is referred to the rate of interest charged by premier banks on the loans and advances. Bank rate varies based on some defined conditions as laid down the governing authority of the banks. Bank rates are levied to control the money supply to and from the bank.
Meaning of bank rate
From the consumer's poinit of view, bank rate ordinarily denotes to the current rate of interest acquired from savings certificate of Deposit. It is most frequently used by the consumers who are concerned in mortgage.
Bank rate types
Some commonest types of bank interest rates are as follows:
- Bank rate on CD, i.e., on certificate of deposit
- Bank rate on the credit of a credit card or other kind of loan
- Bank rate on real estate loan
Interest Rates
Bank interest rate can be defined as the fee paid on borrowed money. The amount loaned is called the principal and the share of the principal that is paid as interest over a defined period of time, is called the interest rate. The bank rate or bank rate of interest is normally classified as:
- Simple interest: Mathematically, simple interest rate can be defined as the result of the product of the principal, the rate of interest and the number of time periods. The calculation is based on the original principal amount. For example, $200 on deposit at 12% simple interest would yield $24 per year.
- Compound interest: Mathematically, the procedure of calculating compound interest is almost similar to the calculation of simple interest rate, with only one exception. The principal varies with every time period, whereas the principal remains the same in case of simple interst calculation. At the end of every time period, the new principal will be previous principal plus the amount of interest on the previous principal. Compound interest rate is alternatively termed as annual percentage rate, effective annual rate, effective interest rate.
- Real interest: Real interest rate is equal to the current interest rate minus inflation rate(inflation rate is defined as the rate of decrease on buying power of money ) or alternatively calculated as the nominal interest rate minus inflation. The basic function of calculating real interest is to measure the value of the interest in units on buying power.
- Cumulative interest: This type of bank rate interest is calculated to ascertain which loan amount will be most economical in nature. For The sum of all interest payments made on a loan over a certain time period. The calculation of cumulative interest is done by subtracting one from the ratio of future value and present value. That is(FV/PV)-1.