Interest rate – What does that means? Well, interest rate is the extrapayment a borrower needs to pay the lender in addition to the loan, at the end of the loan period. In other words, it is the price paid for borrowed money.
Reacting To The Rates
How do the lender and the borrower decide what interest rate fits the?
First of all there is a benchmark for the interest rate; this benchmark is the central bank’s interest rate. The central bank in each country determines its interest rate in order to manage macro parameters such as: investment rates, unemployment, and inflation. Why is the central bank’s interest rate a benchmark? Because the main bank can always print more money and so there is no way that the central bank won’t return its debt and therefore this interest is considered to be free of risk or “safe”. This is not entirely true, however; if inflation increases the lender have less purchasing power in the end of the loan process.
But the central bank only gives loans to other banks, and then those banks give the public loans at a higher interest rate. How do those banks decide what interest rate to offer to which client? The commercial bank uses data it gathers on us as individual and estimates what the risk is that we won’t be able to repay the loan. The interest rate the bank offers us is based on a statistical model that most accurately predicts this chance.
How does the central bank control the investment in the country? Well, it’s easy to guess … The main bank uses the interest rate to control how much money will circulate the market and how much individual will desire to invest money. If the central bank’s interest rate is high, most people will prefer to save the money in the commercial banks and profit from the high interest rate. The high rate will cause much money to sit in the bank, and if the money just sits in the bank you can’t use it to open new businesses and promote new initiatives. On the other hand, a low rate of interest may cause many people to use their money to open new businesses and create more workplaces. For example, if you can open a business that promises a return of 7.5% of the money you invested each year, and the interest rate is 10%, you would just put your money in the bank and get 2.5% more on your investment. But if the interest rate is 2.5%, then you can open your business and earn 7.5%, 5% more than the interest rate that you will get form the commercial bank.
So, what does this have to do with the CEO Game? Well, the CEO Game is unique among business simulations for the degree of realism involved in game play — that is why it is a serious game, and not just a game. Interest rates will change as you play the CEO Game, reflecting changes in the real world. In order to be a successful business tycoon, you will have to understand how the changing interest rate changes your interests — and make changes accordingly.
Omri.
The CEO Game.
October 17th, 2009 at 8:31 am
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor