Unit 3- Mini Projects Project-1 Interest rate is that rate of interest that is paid by a borrower who borrows money

from the lender. The Interest rate is the certain percentage of the principal amount that has been borrowed. Interest rate are taken into account when dealing with variables like investment, inflation and unemployment. Here, we will find out whether, monetary factors are the driving force or goods and capital market disturbances were the major cause of determining the interest rates. The widely used theories are Keynesian liquidity preference theory and Irving isher!s theory. "ome of the determinants of Interest #ates are as follows$

"ome of the factors involves Supply and Demand, an increase in demand for credit will surely increase the interest rates while any decrease in demand of loan or credit will decrease the interest rates. "ay, for e%ample one opens a bank account and you are lending money to the bank, here bank will use this money for investment purpose and will give certain percentage of interest on the principal amount.

Inflation, also affects the rise or slip of interest rates. If the inflation rate is high in any economy then the interest rate will definitely rise, the reason behind this is that the lenders will demand higher interest rates on the money borrowed because the purchasing power has decreased because of the inflation.

Unemployment plays a very important role in the increase or decrease of the interest rates. The practice is when the employment rate is high &overnment reduces the interest rate to boost the purchasing power, while in times of recession the interest rates are increased because the lenders know that purchasing power is low this time and as they don!t want any defaulters they increase the rates so that only those people who can manage these sort of interest rates can take loans.

'ield curve is a graphical representative of the term structure of interest rates that plots the yields of similar(quality bonds against their maturities. The yield curve has three shapes positive, negative and flat shape.The three main theory that e%plains why yield curves are shaped the way it is because $ ).* +%pectations of rising short(term interest rate creates a positive yield curve. ,.* The -liquidity preference hypothesis. states that investors always prefers higher liquidity of short(term debt and so any deviation from positive yield curve will only be a temporary phenomenon. /.* The 0segmented market hypothesis0 states that different investors confine themselves to certain maturity segments, making the yield curve a reflection of prevailing investment policies.

The yield curve takes three primary shapes , if short(terms yields are lower than long(term yields, then the curve is referred to as positive, if the sort(term is higher than long term yield the curve is referred as negative or inverted one. 1nd if there is marginal or no difference between short and long term yield, the curve will be flat.

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