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44 lines
2.9 KiB
Markdown
44 lines
2.9 KiB
Markdown
+++
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draft = false
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semester = ['S1']
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subjectcode = ['ET DCM1107']
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unit = 'Unit 12'
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notecategory = 'Self'
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title = 'Unit 12'
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toc = true
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url = '/uninotes/s1/et-dcm1107/unit12/self/'
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uniturl = '/uninotes/s1/et-dcm1107/unit12/'
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### ***May 25, 2026***
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## Definitions
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### Interest
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The payment or reward given for borrowing money or using capital for a specific period of time.
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### Gross Interest
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The total amount paid by the borrower to the lender for using borrowed money before deducting taxes, service charges, or other expenses.
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### Net Interest
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The actual or pure interest earned or paid after excluding additional charges such as risk, management costs, and inconvenience.
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### Nominal Rate of Interest
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The stated rate of return on a loan or investment without considering the effect of inflation.
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### Real Rate of Interest
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The actual rate of return after adjusting the nominal interest rate for inflation, reflecting the true purchasing power of money.
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### Liquidity
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The ease or availability with which cash or assets can be converted into ready money for immediate use.
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## Theories of Interest
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| Theory of Interest | Economist(s) | Short Summary |
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| ------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ |
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| **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. |
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| **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. |
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| **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. |
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| **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. |
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| **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. |
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