M wants to start an enterprise that manufactures steam irons. The raw

1.	M wants to start an enterprise that manufactures steam irons. The raw material can be imported from Germany that is better in quality. However, for this he requires extra funds which he needs to borrow from the market. In this regard now he wants some clarifications about the factors affecting the market rate of interest to take the best decision.Explain him any of these four factors.
Answer» Market rates of interest go on changing due to various factors. Some of them are as follow: 1. Opportunity cost: refers to any other use to which the money could be put, for example lending to others or investing elsewhere 2. Inflation: Because future inflation is unknown, the lender will always add some ‘premium’ to the expected inflation rate and demand that as his interest rate. 3. Demand and supply: Demand for and supplies of money are the crucial factors in determining the interest rates. 4. Borrower Default: There is always the risk that the borrower will become bankrupt, abscond or otherwise default in repaying the loan. . In order to limit the bad consequences of such situations, the lender usually adds some ‘risk premium’ to the interest rate already decided and quotes such rates to the borrower. 5. Government intervention: Government’s and RBI’s actions may also influence short-term interest rates.

M wants to start an enterprise that manufactures steam irons. The raw material can be imported from Germany that is better in quality. However, for this he requires extra funds which he needs to borrow from the market. In this regard now he wants some clarifications about the factors affecting the market rate of interest to take the best decision.Explain him any of these four factors.

Answer»

Market rates of interest go on changing due to various factors. Some of them are as follow:

1. Opportunity cost: refers to any other use to which the money could be put, for example lending to others or investing elsewhere

2. Inflation: Because future inflation is unknown, the lender will always add some ‘premium’ to the expected inflation rate and demand that as his interest rate.

3. Demand and supply: Demand for and supplies of money are the crucial factors in determining the interest rates.

4. Borrower Default: There is always the risk that the borrower will become bankrupt, abscond or otherwise default in repaying the loan. . In order to limit the bad consequences of such situations, the lender usually adds some ‘risk premium’ to the interest rate already decided and quotes such rates to the borrower.

5. Government intervention: Government’s and RBI’s actions may also influence short-term interest rates.

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