Banks Interest Rates

By: EconomyWatch Content   Date: 5 November 2009

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The term banks interest rates is the interest paid by a bank to customers who deposit their money in the bank. This money, in turn, is used by the bank for lending. While lending, the bank charges the borrower a little more for that same money to make profit on its service. When interest rates are high, fewer people and businesses can afford to borrow, thus slowing down the economy.

From a UK perspective, there is a wide variation in interest rates and the actual interest rate depends on a number of factors:

  • The length of time for which the money is borrowed
  • The security of the loan
  • The nature of the financial institution from which the money is borrowed
  • The amount of competition among financial institutions

A high rate of interest is levied from borrowers who are particularly risky or who have little or no security.

In the United States, the rates do not always move in tandem because they are driven by different forces. Variable interest rate loans are driven by the rates of the Fed Funds. The Fed Funds rates, in turn, are controlled by the Federal Reserve. Interest rates on long-term loans, such as the 15- or 30-year fixed mortgages, are driven by 1-, 5-, and 10-year Treasury Note yields.

Banks Interest Rates: Interest Rate Types

Here are some important interest rate types:

Treasury Note: These treasury notes have fixed interest rates and are auctioned to the highest bidder. Depending on the demand at the auction, the note could cost more or less than the face value.

However, at the end of the note's term, the US government pays back the full face value to the bidder. In effect, bidders are loaning the bid amount to the US government and in return, are obtaining the interest amount and the full face value.

Fed Funds Rate: It is the interest rate that banks charge one another for loans of reserve balances.

Variable Interest Mortgage Rate: This interest rate is generally some points above the prime rate, which is set by the Fed Funds.

Fixed Interest Mortgage Rate: This rate is fixed for the loan's term, either 15 or 30 years, and is very close to the 10- or 30-year Treasury Note yield.

 

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