This article describes the impact of interest rates. A related concept is the Yield Curve.
An interest rate is the cost of borrowing money. Among the many industries affected by fluctuations in interest rates, real estate and banking are perhaps the most directly impacted. When interest rates increase, borrowing becomes more expensive, dampening consumer demand for mortgages and other loan products and negatively affecting residential real estate prices. Rising interest rates can also lead to increased default rates, as holders of adjustable rate debt find themselves faced with higher payments. Vendors of mortgage backed securities, which consist of bundled mortgages, will see their ability to monetize the securities lessens as a result of the deterioration of the quality of the underlying asset.
At any given time, there are a number of interest rates available in the economy. Interest rates vary across the size, risk, duration, and liquidity of an investment. The interest rates for various durations of investments (short- to long-term) are called the Yield Curve.
There are two main determinants of interest rates - the Supply and Demand for Money :.
Interest rate spread refers to the percentage differential between the risk-free Treasury rate and the rate on other, riskier fixed-income securities. Companies that benefit from wider (i.e. bigger) spreads are: