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What are the different types of interest rates?

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linnie4352 | Student, Undergraduate | Salutatorian

Posted March 10, 2011 at 5:01 AM via web

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What are the different types of interest rates?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted March 10, 2011 at 5:09 AM (Answer #1)

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Without more information, it is very hard to know which kinds of interest rates you are asking about.  There are many different kinds of interest rates.

For example, if you are talking about interest rates and inflation, you could have nominal interest rates and real interest rates.  Nominal interest rates are the "plain" rates.  If you borrow money at 8% interest, that is the nominal rate.  The real rate is adjusted for inflation.  To get it, you subtract the rate of inflation from the nominal interest rate.  So, if you borrowed at 8% and inflation was 3%, your real interest rate was 5%.

Another type of interest rate is the prime rate (also called the discount rate).  This is the short term interest rate that large banks (or central banks) charge to their best and most credit-worthy customers.  This is generally the lowest possible interest rate.

There are many other terms for various kinds of interest rates.

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