+++
draft = false
semester = ['S1']
subjectcode = ['ET DCM1107']
unit = 'Unit 12'
notecategory = 'Self'
title = 'Unit 12'
toc = true
url = '/uninotes/s1/et-dcm1107/unit12/self/'
uniturl = '/uninotes/s1/et-dcm1107/unit12/'
+++

### ***May 25, 2026***

## Definitions

### Interest
The payment or reward given for borrowing money or using capital for a specific period of time.

### Gross Interest
The total amount paid by the borrower to the lender for using borrowed money before deducting taxes, service charges, or other expenses.

### Net Interest
The actual or pure interest earned or paid after excluding additional charges such as risk, management costs, and inconvenience.

### Nominal Rate of Interest
The stated rate of return on a loan or investment without considering the effect of inflation.

### Real Rate of Interest
The actual rate of return after adjusting the nominal interest rate for inflation, reflecting the true purchasing power of money.

### Liquidity
The ease or availability with which cash or assets can be converted into ready money for immediate use.

## Theories of Interest

| Theory of Interest                          | Economist(s)                                                | Short Summary                                                                                                                                    |
| ------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| **Abstinence Theory of Interest**           | **Nassau William Senior**                                   | Interest is the reward paid to people who abstain from present consumption and save money for productive use.                                    |
| **Bohm-Bawerk’s (Agio) Theory of Interest** | **Eugen von Böhm-Bawerk** (developed from John Rae’s ideas) | Interest arises because people value present goods more highly than future goods; therefore, compensation is needed for postponing consumption.  |
| **Fisher’s Time Preference Theory**         | **Irving Fisher**                                           | Interest is the “price of time,” determined by people’s preference for present consumption over future consumption and investment opportunities. |
| **Loanable Funds Theory**                   | **Knut Wicksell, Bertil Ohlin, Dennis Robertson**           | Interest is determined by the demand and supply of loanable funds, including savings, investment, bank credit, and hoarding.                     |
| **Liquidity Preference Theory**             | **John Maynard Keynes**                                     | Interest is the reward for parting with liquidity; it is determined by the demand for and supply of money.                                       |