Börsenlexikon: Interest

Interest is the consideration paid by the debtor to the creditor for borrowed capital. The legal basis for this is provided by laws or contracts. In a market economy, the amount of contractually agreed interest is generally determined by supply and demand. The amount of legally determined interest can be set by the legislator.

The word interest stands for the interest rate, expressed as a percentage per interval, e.g. per year. This is to be distinguished from the amount of interest, i.e. the concrete amount of money which, in the case of interest on loans, results from the amount of the capital and the agreed interest rate. Compound interest is the interest that is added to the capital. Mathematically, a distinction is made between simple or linear interest and exponential interest (compound interest). The term interest structure refers to the dependence of the interest rate on the duration of a financial investment. Nominal interest is the interest rate agreed or paid for a loan, real interest is the interest rate after deducting the inflation rate. The real interest rate can be negative if the inflation rate is higher than the nominal interest rate. Effective interest rate is the interest rate that results from the inclusion of the nominal interest rate and other price-determining factors.