What is interest? Account for variation in rates of interest on loans of different kinds.
Interest is the price paid by borrower to the lender for the sue of loan able funds during a certain period. It is normally expressed as a percentage on the funds loaned or borrowed. In the word of Esthan, “Interest is the payment for parting with the advantage of liquid control of money balances.” According to Betch, “Interest is the price paid for use of money or credit.” There is an element of monopolistic competition in the money market in as much as different borrowers are charged different rates of interest. It may be noted however, the pure interest tends to be the same if calculated over the same period of time in the same money market. The actual differences that prevail are difference in the degrees of risk involved and inconveniences suffered by the lenders. Differences in Pure Interest: If pure interest is calculated over the same period of time in the same money market, it will tend to be the same. It can however differ in different markets on account of th...