INTEREST RATE AND MONEY MARKET
Interest rate
The discount rate is the rate of short-term funds which the central bank lends to the commercial banks. When this rate changes, the commercial banks also change their base rate. Banks make profits from the differences between the interest rate they charge borrowers and the rates they pay to depositors. The interest rate borrowers pay to banks depends on their creditworthiness. This is the lender’s estimation of the borrower’s present and future solvency. The higher the borrower’s solvency, the lower the interest rate they pay. For example, mortgages which a house or apartment is collateral for usually have lower interest rate than that of normal loans or overdrafts. Long-term loans as mortgages usually have variable interest rate which change according to the supply and the demand for money.
Hire-purchase has higher interest rate than that of bank loans and overdrafts. These are monthly payments to buy durable goods. Before the payment is complete, the buyer is only hiring the goods. The little guaranty lies behind the high interest rate: the goods are easily damaged.
Money market
The money markets consist of a network of corporations, financial institution, investors and government which need to borrow or invest short-term capital (up to 12 months). For example, a business or government which are in need of cash for a few weeks can use the money market. Banks can also use money market when they want to invest money that depositors can withdraw at any time. Through the money market, borrowers can find short-term liquidity by turning assets into cash. They can also deal with irregular cash flows- incomings and outgoings -more cheaply than borrowing from a commercial banks.
Treasury bills are bonds issued by governments. The most common maturity is three months up to a year. Treasury bills in a country’s currency are