Interest rates are costs that are negotiated between lenders and borrowers.
The interest rate is the amount the borrower pays to the lender to use their money.
The interest rate is a product of the market and market phenomena. They are the outcome of money’s supply and demand.
Interest rates will increase according to the number of individuals seeking to borrow funds.
When interest rates rise, fewer individuals desire to borrow money. If interest rates are high, people pay more to access the same funds. It’ll reduce the borrowing rate, thereby reducing demand for risk assets.
Interest rates may be segmented into two markets:
- The money market
- The bond market.
The money market is for short-term loans with maturities of less than one year.
The bond market is for loans with a maturity of more than a year.
That is the division between loan instruments with terms of less than a year and those with more than a year.
In general, money market instruments have shorter maturities than bonds. There are exceptions to this rule, though. Some money market instruments have longer than one-year maturities, whereas some bonds have shorter than one-year durations. This rule is not absolute; it serves merely as a guide.
That indicates that investors should not consider this rule to be an absolute law but rather a general guideline. Money market instruments are short-term loan instruments, but bonds are longer-term instruments, so it is still important to understand the…