2.9 KiB
+++ 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. |