In simple parlance, interest is the cost of funds. If you are a lender, you will receive interest and if you are a borrower, you will pay interest. The interest is calculated in the percentage of the principal. Thus the percentage cost of the funds (principal) is known as the interest rate.

The interest rate is determined by the interaction of the demand and supply of money in an economy. Factors such as inflation, investment scenario, economic condition, fiscal and monetary policies influence the demand and supply of money.

Normally it is assumed that there is a time value of money, meaning that money today is worth more than tomorrow. This is because money can grow only through investing. An investment delayed…


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