Interest Rates

What Are Interest Rates?

Interest rates refer to the rates at which individuals or financial institutions charge or earn money over a specific period when borrowing, lending/investing.

While commonly associated with money, interest rates can also apply to other financial assets with an agreed intrinsic value, such as cars, houses, or cryptocurrencies.

Interest Rates

Interest Rates | Source: Investopedia

Borrowing Costs Unveiled

Individuals or entities are typically charged an interest rate when they borrow money.

This rate is often expressed as an annual percentage rate (APR), which represents the amount of interest paid each year relative to the total loan amount.

On the other hand, lenders and investors earn interest rates as a return on their investments.

This can include interest earned from holding cash in a savings account or other investment vehicles.

The interest earned is usually expressed as an annual percentage yield (APY), representing the expected annual yield earned as a percentage of the investment.

Crypto Interest Rates

In the realm of cryptocurrency, interest rates function similarly to traditional finance but with added complexity.

Cryptocurrencies’ volatile nature can cause the absolute value of interest to fluctuate significantly over a given period, even if the APR or APY remains constant.

One factor contributing to this volatility is the relationship between interest rates and the principal amount (borrowed or deposited).

If the principal amount increases in value, the absolute value of the interest will also increase proportionally.

However, this may not be the case if the interest rates are pegged to a fiat currency like the US dollar when borrowing or depositing.