What are Interest rates?
Interest rates is the price paid by Central Bank on the deposits of commercial bank and this price is an indicator of the interest rates of commercial banks, what should not be higher than Central Bank price.
Central Bank decides to raise or decline the Interest rates as economic condition and monetary policy required.
It is the first and last controller of rates and issue Interest rates for each country on a monthly basis.
The Central Bank raises Interest rates when thee inflation rates rises thus, the price of money raises and people borrow and business retreat.
Thus, consumption spending and demand reduce and inflation is falling, as well as, raising Interest rates leads to high in local currency exchange price.
This will affect the investor’s direction away from stock markets and commodities to the currency markets and vice versa.
The Central Bank decline Interest rates in the status of economic recession, makes the price of money cheap which makes borrowing increases consumer spending and the economy is refresh.
Bond Interest relationship:
The bond means market value.
After the issue any sold bonds and existing in the market and there is a reverse relationship between market Interest rate and bond price.
Any higher in Interest rate price leads to decline price of bonds offered on the market, so the investor in this case can invest less money and get the same benefit.
In higher Interest rates periods, long term bond prices more than short term bonds and vice versa.
The investor in the bonds should take into account the Interest price and rate of inflation, if it is high they will not be ready to buy.
The financial status of institution issued the bonds, bonds issued from a government institution or major companies are less risky.
The determination of Interest rates by Centrals Banks effects on the status of the economy and the financial and monetary policy of the state.
Its impact on the word more than an interest rate change by the US Federal Reserve.
This will affect the exchange rate of the dollar, which is important in the world trade, the currency of the world largest economies, and many countries are related to the dollar.
As well as the dollar acting as the global reserve currency, and acquires for two third of the foreign exchange reserves and its characterized by heavy trading and more than half of the world’s experts in dollar and uses the dollar in about 90% on the world’s commercial contract and is included in stock exchange in addition to an important commodities such as oil and gas sales are in dollar.
So the change in Interest price in the American Federal Bank considered affecting on the global economy.