Interest

(noun)

The price paid for obtaining or price received for providing money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed.

Related Terms

Examples of Interest in the following topics:

  • Conflicts of Interest

    • A situation in which someone in a position of trust has competing professional or personal interests is known as a conflict of interest.
    • A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.
    • "conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest.
    • Abuse of this type of conflict of interest is called nepotism.
    • Outline how self-dealing, outside employment, family interests, pump and dumps, and gifts exemplify conflicts of interest, and differentiate that from an impropriety

  • Growth Through Monetary Policy

    • Monetary policy seeks to further economic policy goals through influencing interest rates.
    • Through monetary policy, the government exerts its power to regulate the money supply and level of interest rates.
    • To counter a recession, the Fed uses expansionary policy to increase the money supply and reduce interest rates.
    • With lower interest rates, it's cheaper to borrow money, and banks are more willing to lend it.
    • An expansionary policy increases the size of the money supply more rapidly or decreases the interest rate.

  • Debt Utilization Ratios

    • The debt service coverage ratio (DSCR), also known as debt coverage ratio (DCR), is the ratio of cash available for debt servicing to interest, principal, and lease payments.
    • DSCR = (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash and discretionary items (such as non-contractual management bonuses)) / (Principal Repayment + Interest payments + Lease payments)
    • A similar debt utilization ratio is the times interest earned (TIE), or interest coverage ratio.
    • It may be calculated as either EBIT or EBITDA, divided by the total interest payable.
    • EBIT is earnings before interest and taxes, and EBITDA is earnings before interest, taxes, depreciation, and amortization.

  • Promotions

    • Promotional pricing means temporarily reducing the price of an established product in order to increase interest in customers.
    • Promotional pricing means temporarily reducing the price of an established product in order to increase interest in customers.
    • This is sometimes done because the sales of the product are falling and the firm wants to renew customer's interest in it.
    • When this is done, interest in goods can be greatly increased, meaning sales are also likely to increase dramatically.

  • The Reserve Requirement

    • Requiring depository institutions to hold a certain fraction of their deposits in reserve, either as cash in their vaults or as non-interest-bearing balances at the Federal Reserve, does impose a cost on the private sector.
    • The cost is equal to the amount of forgone interest on these funds—or at least on the portion of these funds that depository institutions hold only because of legal requirements and not to meet their customers' needs.
    • Unless it is accompanied by an increase in the supply of Federal Reserve balances, an increase in reserve requirements (through an increase in the required reserve ratio, for example) reduces excess reserves, induces a contraction in bank credit and deposit levels, and raises interest rates.
    • It also pushes up bank funding costs by increasing the amount of non-interest-bearing assets that must be held in reserve.
    • Conversely, a decrease in reserve requirements, unless accompanied by a reduction in Federal Reserve balances, initially leaves depository institutions with excess reserves, which can encourage an expansion of bank credit and deposit levels and reduce interest rates.

  • Resolving Disagreements

    • Major League Baseball uses a variant of interest arbitration, in which an arbitrator chooses between the two sides' final offers, to set the terms for contracts for players who are not eligible for free agency.
    • Interest arbitration is now most frequently used by public employees who have no right to strike (for example,, law enforcement and firefighters).
    • This type of arbitration, wherein a neutral arbitrator decides the terms of the collective bargaining agreement, is commonly known as interest arbitration.
    • Major League Baseball uses a variant of interest arbitration, in which an arbitrator chooses between the two sides' final offers, to set the terms for contracts for players who are not eligible for free agency.
    • Interest arbitration is now most frequently used by public employees who have no right to strike (for example, law enforcement and firefighters).

  • Long-Term Loans

    • Governments may create money to monetize their debts, thereby removing the need to pay interest.
    • This practice, also known as quantitative easing, reduces government interest costs but does not actually cancel government debt.
    • In U.S. property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his or her interest (right to the property) as security or collateral for a loan.
    • Interest: Interest may be fixed for the life of the loan or variable, and it may change at certain pre-defined periods; the interest rate may rise or fall.
    • The interest paid to debenture holders is a charge against profit in the company's financial statements.

  • Control of the Money Supply

    • By purchasing government bonds (especially Treasury Bills), this bids up their prices, so that interest rates fall at the same time that the monetary base increases.
    • Accordingly, a nation's central bank can maintain control of such reserves by lending to commercial banks and altering the rate of interest to be charged on such loans.
    • By controlling the national interest rate, a central bank can adequately meet and further dictate the consumer demand for money.
    • A decrease in the interest rate will spark an increase in the consumer demand for money; an increase in the rate of interest will lessen its demand.
    • Changes in the interest rate also play a role in the setting of price levels.

  • Debt Finance

    • A bond entitles the holder to repayment of the principal sum, plus interest.
    • Interest may be added to the end payment, or can be paid in regular installments (also known as coupons) during the life of the bond.
    • Lending to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate".
    • This is because the debt and interest are highly unlikely to be defaulted.
    • A risk-free rate is also commonly used in setting floating interest rates, which are usually calculated as the risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor (in other words, the risk of him or her defaulting and the creditor losing the debt).

  • Owners' Equity

    • In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid.
    • In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.
    • After liabilities have been accounted for, the positive remainder is deemed the owners' interest in the business.
    • In financial accounting, equity capital is the owners' interest on the assets of the enterprise after deducting all its liabilities.