Interest and Interest rate

So lets understand what is interest .Lets start with a scenario; Suppose you have two houses, one in which you live and the other is simply there without use. So you plan to rent your unused house for a premium every month. Now take the same scenario; This time you have 10000$ simply sitting in your hand. So you plan to rent it to a person so that you earn a premium every month. This premium is called interest. The renting of the money(Capital) can be done directly to a person or indirectly through banks. You can also lend money to your own government through bonds. G-sec, T-bills. So every time you rent(lend)your unused money(capital) you earn interest.

          Now I would like to say a major fact; All of the major religions of the world prohibits money lending and taking interest. But renting property and taking rent is lawful ;what a joke. So what I want to say to you people is think rationally and go-ahead. In medieval Europe its was considered a sin and now a days the best example is Arab countries. So if your conservative you can drop here else go-ahead. You may have different opinion but this is my opinion.

      Now coming into interest rate. What is interest rate? An interest rate is the amount of interest due per period, as a proportion of the amount lent; which simply means how much percentage you have to pay out of the total money as rent(Interest) It may be 10% of principle amount you loaned to someone or 8% etc..

     The Interest rates are fixed by Fed reserves in US or RBI here in India. There are many factors affecting interest rates. Main factor which inversely control interest rate is Inflation. I will explain Inflation tomorrow.so that's all for today.

    Now the safest way to earn interest is by making bank deposits. But these days you can see the FD interests are going even negative. Countries like Japan ha negative Interest rate. So their the concept is you have to give banks charge so that the Bank will keep your money securely. But in these countries the inflation is negligible. So how can you earn an interest on the money you are lending?. The answer is debt instruments. I will explain all these instruments in the coming blogs. In the coming blogs we will discuss how we can use the interest to build wealth.