Who determines interest rate returns % on investments ?
Answers:
Interest rate is deathly important. In the UK, the power to determine common interest rates was wrenched from the government and put into the hands of the Bank of England. The Bank of England is the bank for banks. NATWEST, the Abbey and so on, deposit money here, and can withdraw it to. The Bank of England is THE bank, which is why our money is guaranteed by the bank. They control the 'base rate'. This is the minimum, if you like. Banks will then add their costs to this. They will also add a percentage for the risk they are taking with you.
There is also an element of competition. Banks need your money to play with it and earn themselves more money, to pay you for giving them your money, and to pay themselves for making more. Everyone is paid into their bank account. This is a large amount of money each month. They want it and will give you a decent interest rate on it. But you take it out quickly, so they don't get to play with it for very long, therefore, less money to them, less interest to you. If you give them xyz each month for a period, then they have your money for longer and can earn more for them, and pay you a bit more. Therefore, you get a higher rate of interest for long-term investment, and low interest rates on current accounts and the like.
Some cockhead in a posh office.
Intrest rates trickle down from the ultimate determination. The Federal Fund Rate that is what the Fed Government charges banks for short term loans. It is referred to as the Fed Rate. Then, banks adjust their rates accordingly and so on down the food (or money) train.
Bank of England.
There are two interest rates set by the Federal Open Market Committee which is a group within the Federal Reserve which oversees the banking regulations and monetary policy for the United States. These two interest rates generally coincide but are actually two different things.
First is the federal funds rate:
The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
The second interest rate is the discount rate:
This is the rate at which a depository institution can borrow money from the federal reserve
The first interest rate is a desired level, it is unenforcable by the Federal Reserve but everyone does follow it anyways.
Basically what happens is that the Federal Reserve says that banks should loan each other at X% and No-name-bank-governors say they must make Y% on every loan so therefore they can afford to offer their depositors Z% on the money they have invested with the bank.
It depends on the type of investment. If you purchase a one year cd the interest rate is set by the financial institution you purchased it from. It is set in advance and is a contract rate between you and the financial institution.
If you purcase a bond in the secondary market, that interest rate is also set. It was set at the time the bond was issued, but the price of the bond varies in the secondary market with prevailing interest rates and with the credit rating of the insure.
Prevailing intest rates are dependent upon several things one of which is the Federal Reserve and how they have chosen to manipulate the rates. It is also dependent upon interest rates in other countries and in the soundness of the dollar verses other currencies. It also depends on inflation rates.
The base rate is established by central banks and applies to clearing banks who in turn use this rate as a basis to set an interest rate for their loan products. The riskier you are as a borrower, the higher the interest rate you will be charged.
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