Higher Interest Rate

Higher Interest Rate
Interest rate is the amount that the person who takes loan for his needs and repays for that amount that they don’t possess. Interest rate is usually set as percentage rate for a period of one year. Interest rates are very important for monetary policy and used to manage inflation, unemployment. A paper titled ‘Effect of Interest Rate on Consumption’ presented at Indian Statistical Institute, New Delhi is that a raise in interest rate (10%) is directly proportionally to drop in consumption expenditure.

Fiscal Deficit= Total Expense (Revenue + Capital) – (Revenue Receipts + Non-debt Capital Receipts).

Moving to Deficits, it simply means a big loan by the government that surely lead to high inflation, high interest rates. Substantially it puts a long term debt burden onto the future generations which is inevitable. But if the deficit arises due large capital expense then it is to be welcomed as this expense increases the economic capability. And if the deficit is due to large revenue expense, that is interest payment, subsidies, then deficit is adverse.

Fluctuations in interest rate are a big opening for financiers. With increase in interest rates, the cost of existing fixed income asset things reduce and with decrease in interest rates, the cost of fixed income asset increase. So the shareholder should evaluate the different interest rate deviation situations and investing in long term fixed income assets would be an unwise act if there is going to be increase in interest rates over next many years.

The change in interest rates is termed as “interest rate risk”. An increase in interest rates creates a threat of loss in the value of bonds and a fall in interest rates results in raise in prices of bonds.