Financial Management System

financial management system E-Mail Print A AA AAA Facebook Twitter Share This RSS ReprintsA financial management system is the methodology and software that an organization uses to oversee and govern its income, expenses, and assets with the objectives of maximizing profits and ensuring sustainability.An effective financial management system improves short- and long-term business performance by streamlining invoicing and bill collection, eliminating accounting errors, minimizing record-keeping redundancy, ensuring compliance with tax and accounting regulations, helping personnel to quantify budget planning, and offering flexibility and expandability to accommodate change and growth.Other significant features of a good financial management system include: Keeping all payments and receivables transparent. Amortizing prepaid expenses. Depreciating assets according to accepted schedules. Keeping track of liabilities. Coordinating income statements, expense statements, and balance sheets. Balancing multiple bank accounts. Ensuring data integrity and security. Keeping all records up to date. Maintaining a complete and accurate audit trail. Minimizing overall paperwork.http://searchfinancialapplications.techtarget.com/definition/financial-management-systemFinancial Management SystemThe Financial Management System (FMS) is a key component of Systematics' integrated retail banking software, providing a flexible and fully automated financial accounting system. Critical management information is provided through responsibility center reporting, budgeting and forecasting, historical and statistical analysis, and cost allocation.Financial Management System is a flexible, user-oriented tool that includes analysis capabilities and provides complete statements of condition and income/expense reports, grouped and consolidated. The system is a true management tool, as well as a centralized, comprehensive accounting system that includes budgeting, cost allocation and account reconciliation to aid management in making decisions about the use and control of an organizations funds.Financial Management System interfaces to FIS' deposit, lending and architecture solutions.Features Automated general ledger processing and account reconciliation Responsibility center reporting and other reporting tools Cost allocation, budgeting and forecasting Historical and statistical analysis Floating decimal and multicurrency capabilityFinancial Management System: The Financial Management System (FMS) is the electronic general ledger for VA. Its purpose is to track obligations and expenditures by facility and time period (month, quarter and fiscal year). Cost centers and subaccounts (budget object codes) are used to organize the data by purpose, such as labor costs, medical supplies, and overhead.

http://en.wikipedia.org/wiki/Savings_accountSavings accountFrom Wikipedia, the free encyclopediaThis articleneeds additional citations forverification.Please helpimprove this articlebyadding citations to reliable sources. Unsourced material may be challenged and removed.(October 2013)

Apassbook, the traditional record of savings account transactionsBankingA series onfinancial services

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v t e

Saving accountsare accounts maintained by retailfinancial institutionsthat payinterestbut cannot be used directly asmoneyin the narrow sense of amedium of exchange(for example, by writing acheque). These accounts let customers set aside a portion of their liquid assets while earning a monetary return. For the bank, money in a savings account may not be callable immediately and in some jurisdictions, does not incur areserve requirement, freeing up cash from the bank's vault to be lent out with interest.The other major types ofdeposit accountaretransactional account(checking accountorcurrent accountby country),money market account, andtime deposit.Contents [hide] 1Regulation 2Costs 3Online savings accounts 4References 5External linksRegulation[edit]In the United States, underRegulation D, 12 (CFR) 204.2(d)(2), the term "savings deposit" includes a deposit or an account that meets the requirements of Sec. 204.2(d)(1) and from under the terms of the deposit contract or by practice of thedepository institution, the depositor is permitted to make up to six pre-authorized transfers or withdrawals per month or statement cycle of at least four weeks. There is no regulation limiting number of deposits into the account.Within mostEuropeancountries,[clarification needed]interest paid on deposit accounts is taxed at source. The high rates of some countries has led to the development of a significant offshore savings industry. TheEuropean Union Savings Directivehas made arrangements with manyoffshore financial centresfor either information on interest earned to be shared withEUtax authorities or for withholding tax to be deducted on interest paid on offshore accounts, because of concerns relating to potentialtax evasion. Account holders must either pay the withholding tax or disclose account holder information to relevant tax authorities.[1]Costs[edit]Withdrawals from a savings account are occasionally costly, and they are more time-consuming than withdrawals from a demand (current) account. However, most saving accounts do not limit withdrawals, unlikecertificates of deposit. In the United States, violations of Regulation D often involve a service charge, or even a downgrade of the account to a checking account. With online accounts, the main penalty is the time required for theAutomated Clearing Houseto transfer funds from the online account to a "brick and mortar" bank where it can be easily accessed. During the period between when funds are withdrawn from the online bank and transferred to the local bank, no interest is earned.Online savings accounts[edit]Some financial institutions offer online-only savings accounts. These usually pay higher interest rates and sometimes carry higher security restrictions. Online access has opened the accessibility ofoffshore financial centresto the wider public.

http://www.imoney.ph/savings-account?utm_source=google&utm_medium=cpc&utm_campaign=PH-Search-Savings&keyword=banking%20savings%20account&network=g&device=c&devicemodel=&placement=&Type=Search Compare Savings Account FAQ Ask UsBank & Product NameInterest up toInitial DepositBalance to earn InterestFine PrintApply

Allied BankAngat Savings Account

2.50%10,00010,000Average Daily Balance P10,000, Special savings account which earns higher interest than a regular savings accountApply

Allied BankGolden Passbook Savings Account

2.38%10,00010,000Average Daily Balance P10,000, Interest bearing deposit placement evidenced by a passbook and earns higher interest than a regular savings accountApply

CitibankCiti e-Savings Plus

2.00%100,000100,000Regular e-savings account 2.50% for Citibank SavingsApply

RCBC Savings BankDragon Peso Savings Account

1.75%25,00025,000Regular savings accountApply

BPIAdvance Savings Account

1.50%100,000100,000Savings account with advance depositApply

ChinabankDiamond Savings


CitibankCiti e-Savings

1.50%100,000100,0002.25% for Citibank SavingsApply

BDOOptimum Peso Savings Account

1.25%30,00030,000Free withdawal from your account up to 3 times a monthApply

BPI Family SavingsMaxi-Saver Savings

1.25%25,00025,000Savings account with a bonus interest rate feature (0.5% p.a. if no withdrawal is made for the month) 0.5% p.a. bonus interest if no withdrawal within the month Choose between an ATM or a passbook.Apply

Security BankBuild-up Savings

1.25%5,0005,000A regular savings account that only let's you withdraw money for free up to three times a quarter.Apply

BPI Family SavingsSave-Up Automatic Savings

1.13%3,000Savings account with option of higher interest rate or free BPI-Philam Life insuranceApply

Allied BankRegular Savings Account

1.00%1,0001,000Average Daily Balance P1,000, Entitled to interest provided that it meets the minimum average daily balance requirementApply

BPIMaxi-Saver Savings

1.00%50,00050,000Savings account with a bonus interest rate feature (0.5% p.a. if no withdrawal is made for the month) 0.5% p.a. bonus interest if no withdrawal within the month Choose between an ATM or a passbookApply

BPI Direct SavingsDirect Maxi-Saver Savings

1.00%25,00025,000Savings account with a bonus interest rate feature (0.5% p.a. if no withdrawal is made for the month)Apply

Equicom Savings BankKiddie Builders Savings Account

1.00%5001,000Free dental and medical benefits when account balance reaches P15,000Apply

MaybankIM Teen Savings Account

1.00%5005,000Savings account with a personal accident and medical reimbursement benefit for individuals aged 13 to 17Apply

MaybankYippie Savings Account

1.00%5005,000Free Personal Accident Insurance: Up to P500,000, Savings account with a personal accident and medical reimbursement benefit for individuals aged 12 and below, Free personal accident insurance coverage with medical reimbursement benefitsApply

BPISave-Up Automatic Savings

0.88%5,000Basic Life Insurance: 5x account balance up to P2 million, Savings account with option of higher interest rate or free BPI-Philam Life insurance; or A free life insurance coverage up to 10x account balanceApply

BPI Direct SavingsDirect Express Teller Savings

0.75%500500Regular savings accountApply

BPI Direct SavingsBPInoy Savings

0.75%500Regular savings accountApply

BPI Direct SavingsSave-Up Automatic Savings + Insurance

0.75%1,000Save automatically from your ATM based savings account FREE BPI-Philam Life insurance equivalent to as much as 10x your account balance up to Php 4 millionApply

CitibankCiti Peso High Rate Saver

0.75%100,000100,000Savings account with bonus interest rate feature (0.25% p.a. for consecutive increase) Earn bonus interest rate of 0.25% p.a.Apply

BPI Family SavingsJumpstart Savings

0.50%1001,000Exclusively for individuals aged 10 to 17Apply

BPI Family SavingsPassbook Savings

0.50%10,00025,000Regular savings account with a passbookApply

BPI Family SavingsEasy Saver

0.50%2001,000Regular savings accountApply

BPI Family SavingsExpress Teller Savings


BPI Family SavingsGet Started Savings Account with Life Insurance

0.50%5,00010,000Savings account with free BPI-Philam Life Insurance. You can either get an ATM or a PassbookApply

ChinabankMoneyPlus Savings


Equicom Savings BankPassbook Savings Account

0.50%5,0005,000Regular savings account with a passbook Option of ATM Key Card with Debit Card functionApply

Equicom Savings BankATM Savings Account


MaybankClassic Savings Account

0.50%10,00010,000Apply

MaybankSave 'n Protect Savings Account

0.50%20,00020,000Average Daily Balance should be 50,000 to avail of insurance coverage, Free Life Insurance Coverage: Up to P3 million for multiple accounts, Savings account with free life insurance benefit, Free life insurance coverage if your savings reaches P50,000, Free initial inter-country access ATM cardApply

MaybankValue Savings Account


Planters BankSME Teen Club

0.50%1,0002,000Exclusively for teens aged 13 to 19Apply

Planters BankRegular Savings Account

0.50%3,0005,000Apply

Planters BankSME Kiddie Club

0.50%5001,000Exclusively for kids between age 12 and 17Apply

PSBankInstant ATM Savings


PSBankPSBank Regular Passbook Savings with ATM


PSBankPSBank Regular Passbook Savings


RCBC Savings BankWISE Savings Account

0.50%5005,000Free Personal Accident Insurance: Minimum account opening of P1,000, Exclusively for individuals aged 7 to 14 Free personal accident insurance for both parent and childApply

RCBC Savings BankE-Passbook

0.50%30,00030,000Regular savings account with an e-passbookApply

RCBC Savings BankBasic Savings Account (Passbook)


Sterling Bank of AsiaSolo Savings Account


BDOClub 60 Peso

0.38%5,0005,000Exclusively for individuals aged 60 and aboveApply

BDOPower Teens Club

0.25%2,0002,000Exclusively for teens aged 13 to 19Apply

BDOPeso Passbook Savings Account

0.25%5,0005,000Fixed interest on your savingsApply

BDOPeso ATM


BDOJunior Savers Club

0.25%500500Exclusively for your children aged 12 and belowApply

BDODirect Deposit Peso Savings Account

0.25%5,000Receive your pension through your Direct Deposit Peso Savings AccountApply

BPIJumpstart Savings

0.25%1002,000Exclusively for individuals aged 10 to 17Apply

BPIGet Started Savings Account with Life Insurance

0.25%25,00025,000Free insurance up to P2 million, Savings account with free BPI-Philam Life Insurance Free BPI-Philam Life Insurance up to 5x account balance Choose between an ATM or a passbook.Apply

BPIExpress Teller Savings

0.25%5005,000Free insurance up to P4 million, Regular savings accountApply

BPIPassbook Savings


BPIEasy Saver


ChinabankStatement of Savings


ChinabankPassbook Savings


CitibankCiti Peso Bonus Saver

0.25%50,00050,000Bonus Interest: Increase average balance by P5,000 per monthApply

EastWest BankATM Access Savings Account


EastWest BankPassbook Savings Account

0.25%5,00010,000Regular savings account with a debit cardApply

EastWest BankPassbook + Debit Card

0.25%10,00025,000Regular savings account with a passbook and debit cardApply

EastWest BankCool Savers Kiddie Account

0.25%2,0002,000Exclusively for individuals aged 18 and belowApply

EastWest BankBasic Savings Account

0.25%100500Regular savings account with a debit cardApply

MetrobankUS Pensioner Savings Account

0.25%50010,000Pensioner savings accountApply

MetrobankSSS Pensioner Savings Account


MetrobankPassbook Savings Account


MetrobankOFW Savings Account


MetrobankET SSS Pensioner Savings Account


MetrobankET Savings Account


MetrobankET OFW Savings Account


MetrobankFun Savers Club

0.25%5004,000Exclusively for kids and teens under 18Apply

Security BankPeso Savings

0.25%500500Regular savings account either you get an ATM or a PassbookApply

UCPBMulti One

0.25%20,00020,000Savings account with current account featuresApply

UCPBRegular Peso Savings Account

0.25%2,00010,000Regular savings account You can either get an ATM or a Passbook.Apply

UCPBKiddie Max Account


Union BankUnionBank Savings Account


Malayan BankPeso Savings Account

1,000500Regular savings account with a passbookApply

Malayan BankATM Savings Account

1,000500Regular savings accountApply

Security BankeSecure Savings Account

5005,000Regular e-savings account that is earning based on the prevailing market interest rate.Apply

What is A Savings Account?A savings account or passbook savings allows you to save money while being able to enjoy the flexibility it offers since it is available on demand with any withdrawal restrictions like being able to withdraw a specific amount. Banks offer savings accounts in different currencies in the Philippines. Peso and dollar saving accounts are most popular.How to find the Savings Account Best Interest Rate?It can be quite confusing finding the right savings account for your personal needs. Therefore, we have listed the accounts above and their most important information. By clicking on the top of the interest column, the savings accounts will be sorted by interest rate. Terms and conditions apply.How to Open a Savings Account?Once you have found the bank you want to open an account with, click the button right next to it. Requirements like the initial deposit and identifications will have to be ready. We will guide you through the application process.Is Having A Savings Account Enough?No. The savings account is just actually there as a source of immediate money in times that you will need like an emergency, or could be used to buy assets or investments. Nowadays, having just savings in the bank wouldn't put you through retirement and honestly, inflation beats out saving accounts interest rates any day.

Definition of 'Time Deposit'

A savings account or certificate of deposit (CD) held for a fixed-term, with the understanding that the depositor can make a withdrawal only by giving notice. A time deposit is an interest-bearing bank deposit that has a specified date of maturity. A bank is authorized to require depositors to give 30 days notice before withdrawing funds from a savings account; however, passbook accounts are typically considered readily available funds and account holders can make withdrawals without giving advance notice. Certificates of deposit are issued for a specified term, such as 30 days (the minimum) up to five years. Although funds can be withdrawn from CDs without notice (on demand), there are penalties for early withdrawal.http://www.investopedia.com/terms/t/timedeposit.asp

http://en.wikipedia.org/wiki/Time_depositTime depositFrom Wikipedia, the free encyclopediaBankingA series onfinancial services

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The examples and perspective in this articlemay not represent aworldwide viewof the subject.Pleaseimprove this articleand discuss the issue on thetalk page.(September 2011)

Atime deposit(also known as acertificate of depositin theUnited States, aterm deposit, particularly inCanada,AustraliaandNew Zealand; abondin theUnited Kingdom;Fixed DepositsinIndiaand in some other countries) is a money deposit at abanking institutionthat cannot be withdrawn for a certain "term" or period of time (unless a penalty is paid). When the term is over it can be withdrawn or it can be held for another term. Generally speaking, the longer the term the better the yield on the money. In its strict sense, certificate deposit is different from that of time deposit in terms of its negotiability: CDs are negotiable and can be rediscounted when the holder needs some liquidity, while time deposits must be kept until maturity.The opposite, sometimes known as asight depositor "on call" deposit, can be withdrawn at any time, without any notice or penalty: e.g., money deposited in achecking accountin a bank.The rate of return is higher than for savings accounts because the requirement that the deposit be held for a prespecified term gives the bank the ability to invest it in a higher-gain financial product class. However, the return on a time deposit is generally lower than the long-term average of that of investments in riskier products like stocks or bonds.A time deposit is an interest-bearing bank deposit that has a specified date of maturity. A deposit of funds in a savings institution is made under an agreement stipulating that (a) the funds must be kept ondepositfor a stated period of time, or (b) the institution may require a minimum period of notification before a withdrawal is made."Small" time deposits are defined in the U.S. as those under $100,000, while "large" ones are $100,000 or greater in size. The term "jumbo CD" is commonly used in the United States to refer to large time deposits.In the U.S., banks are not subject to areserve requirementagainst their time deposit holdings.See also[edit] Certificatehttp://financial-dictionary.thefreedictionary.com/Short-Term+Interest+Rates Short-term interest rates Interest rates onloancontracts-or debt instruments such as Treasury bills, bank certificates of deposit or commerical paper-having maturities of less than one year. Often called money market rates. Copyright 2012,Campbell R. Harvey. All Rights Reserved. Short-Term Interest Rate Theinterest rateon aloanor other obligation with amaturityof less than one year. A commonly followed short-term interest rate is the rate on aTreasury bill. Short-term interest rates are also called money market rates. Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved

long term interest rateWeb definitions1. (%) is the interest rate earned by a note or bond having a maturity of ten or more years.

Interest rateFrom Wikipedia, the free encyclopedia

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (October 2008)FinanceBilleteiNTER II.jpgFinancial markets[show]Financial instruments[show]Corporate finance[show]Personal finance[show]Public finance[show]Banks and banking[show]Financial regulation[show]Standards[show]Economic history[show]v t eAn interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor). Specifically, the interest rate (I/m) is a percent of principal (P) paid a certain amount of times (m) per period (usually quoted per annum). For example, a small company borrows capital from a bank to buy new assets for its business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are normally expressed as a percentage of the principal for a period of one year.[1]

Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. This happened in Japan in the late 1980s and early 1990s, resulting in the large unpaid debts to the Japanese banks and the bankruptcy of these banks and causing stagflation in the Japanese economy (Japan being the world's second largest economy at the time), with exports becoming the last pillar for the growth of the Japanese economy throughout the rest of the 1990s and early 2000s. The same scenario resulted from the United States' lowering of interest rate since the late 1990s to the present (see 20072012 global financial crisis) substantially by the decision of the Federal Reserve System. Under Margaret Thatcher, the United Kingdom's economy maintained stable growth by not allowing the Bank of England to reduce interest rates. In developed economies, interest-rate adjustments are thus made to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum.[2][3][4][5][6]

Contents [hide] 1 Interest rate notations2 Historical interest rates2.1 Interest rates in the United States3 Reasons for interest rate changes4 Real vs nominal interest rates5 Market interest rates5.1 Inflationary expectations5.2 Risk5.3 Liquidity preference5.4 A market interest-rate model5.5 Spread6 Interest rates in macroeconomics6.1 Elasticity of substitution6.2 Output and unemployment6.3 Open Market Operations in the United States6.4 Money and inflation7 Impact on savings and pensions8 Mathematical note9 Zero interest rate policy10 Negative interest rates10.1 Negative interest on central bank reserves11 See also12 Notes13 References14 External linksInterest rate notations[edit]What is commonly referred to as the interest rate in the media is generally the rate offered on overnight deposits by the Central Bank or other authority, annualized.[citation needed]

The total interest on a loan or investment depends on the timescale the interest is calculated on, because interest paid may be compounded.

In retail finance, the annual percentage rate and effective annual rate concepts have been introduced to help consumers easily compare different products with different payment structures.

In business and investment finance, the effective interest rate is often derived from the yield, a composite measure which takes into account all payments of interest and capital from the investment. The notion of annual effective discount rate, often called simply the discount rate, is also used in finance, as an alternative measure to the effective annual rate which is more useful or standard in some contexts. A positive annual effective discount rate is always a lower number than the interest rate it represents.

Historical interest rates[edit]

Germany experienced deposit interest rates from 14% in 1969 down to almost 2% in 2003In the past two centuries, interest rates have been variously set either by national governments or central banks. For example, the Federal Reserve federal funds rate in the United States has varied between about 0.25% to 19% from 1954 to 2008, while the Bank of England base rate varied between 0.5% and 15% from 1989 to 2009,[7][8] and Germany experienced rates close to 90% in the 1920s down to about 2% in the 2000s.[9][10] During an attempt to tackle spiraling hyperinflation in 2007, the Central Bank of Zimbabwe increased interest rates for borrowing to 800%.[11]

[icon]This section requires expansion. (October 2008)The interest rates on prime credits in the late 1970s and early 1980s were far higher than had been recorded higher than previous US peaks since 1800, than British peaks since 1700, or than Dutch peaks since 1600; "since modern capital markets came into existence, there have never been such high long-term rates" as in this period.[12]

Possibly before modern capital markets, there have been some accounts that savings deposits could achieve an annual return of at least 25% and up to as high as 50%. (William Ellis and Richard Dawes, "Lessons on the Phenomenon of Industrial Life... ", 1857, p IIIIV)

Interest rates in the United States[edit]In the United States, authority for interest rate decisions is divided between the Board of Governors of the Federal Reserve (Board) and the Federal Open Market Committee (FOMC). The Board decides on changes in discount rates after recommendations submitted by one or more of the regional Federal Reserve Banks. The FOMC decides on open market operations, including the desired levels of central bank money or the desired federal funds market rate. Currently, interest rates in the United States are at or near historical lows.

Reasons for interest rate changes[edit]Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.Deferred consumption: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time to realize.Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.Real vs nominal interest rates[edit]Further information: Fisher equationThe nominal interest rate is the amount, in percentage terms, of interest payable.

For example, suppose a household deposits $100 with a bank for 1 year and they receive interest of $10. At the end of the year their balance is $110. In this case, the nominal interest rate is 10% per annum.

The real interest rate, which measures the purchasing power of interest receipts, is calculated by adjusting the nominal rate charged to take inflation into account. (See real vs. nominal in economics.)

If inflation in the economy has been 10% in the year, then the $110 in the account at the end of the year buys the same amount as the $100 did a year ago. The real interest rate, in this case, is zero.

After the fact, the 'realized' real interest rate, which has actually occurred, is given by the Fisher equation, and is

r = \frac{1+i}{1+p}-1\,\!where p = the actual inflation rate over the year. The linear approximation

r \approx i-p\,\!is widely used.

The expected real returns on an investment, before it is made, are:

i_r = i_n - p_e\,\!where:

i_r\,\! = real interest ratei_n\,\! = nominal interest ratep_e\,\! = expected or projected inflation over the yearMarket interest rates[edit]There is a market for investments which ultimately includes the money market, bond market, stock market, and currency market as well as retail financial institutions like banks.

Exactly how these markets function are sometimes complicated. However, economists generally agree that the interest rates yielded by any investment take into account:

The risk-free cost of capitalInflationary expectationsThe level of risk in the investment of a fiatThe costs of the transactionThis rate incorporates the deferred consumption and alternative investments elements of interest.

Inflationary expectations[edit]According to the theory of rational expectations, people form an expectation of what will happen to inflation in the future. They then ensure that they offer or ask a nominal interest rate that means they have the appropriate real interest rate on their investment.

This is given by the formula:

i_n = i_r + p_e\,\!where:

i_n\,\! = offered nominal interest ratei_r\,\! = desired real interest ratep_e\,\! = inflationary expectationsRisk[edit]The level of risk in investments is taken into consideration. This is why very volatile investments like shares and junk bonds have higher returns than safer ones like government bonds.

The extra-interest charged on a risky investment is the risk premium. The required risk premium is dependent on the risk preferences of the lender.

If an investment is 50% likely to go bankrupt, a risk-neutral lender will require their returns to double. So for an investment normally returning $100 they would require $200 back. A risk-averse lender would require more than $200 back and a risk-loving lender less than $200. Evidence suggests that most lenders are in fact risk-averse.[13]

Generally speaking, a longer-term investment carries a maturity risk premium, because long-term loans are exposed to more risk of default during their duration.

Liquidity preference[edit]Most investors prefer their money to be in cash than in less fungible investments. Cash is on hand to be spent immediately if the need arises, but some investments require time or effort to transfer into spendable form. This is known as liquidity preference. A 1-year loan, for instance, is very liquid compared to a 10-year loan. A 10-year US Treasury bond, however, is liquid because it can easily be sold on the market.

A market interest-rate model[edit]A basic interest rate pricing model for an asset

i_n = i_r + p_e + rp + lp\,\!Assuming perfect information, pe is the same for all participants in the market, and this is identical to:

i_n = i^*_n + rp + lp\,\!where

in is the nominal interest rate on a given investmentir is the risk-free return to capitali*n = the nominal interest rate on a short-term risk-free liquid bond (such as U.S. Treasury Bills).rp = a risk premium reflecting the length of the investment and the likelihood the borrower will defaultlp = liquidity premium (reflecting the perceived difficulty of converting the asset into money and thus into goods).Spread[edit]The spread of interest rates is the lending rate minus the deposit rate.[14] This spread covers operating costs for banks providing loans and deposits. A negative spread is where a deposit rate is higher than the lending rate.[15]

Interest rates in macroeconomics[edit]Elasticity of substitution[edit]The elasticity of substitution (full name should be the marginal rate of substitution of the relative allocation) affects the real interest rate. The larger the magnitude of the elasticity of substitution, the more the exchange, and the lower the real interest rate.

Output and unemployment[edit]Interest rates are the main determinant of investment on a macroeconomic scale. The current thought is that if interest rates increase across the board, then investment decreases, causing a fall in national income. However, the Austrian School of Economics sees higher rates as leading to greater investment in order to earn the interest to pay the depositors. Higher rates encourage more saving and thus more investment and thus more jobs to increase production to increase profits. Higher rates also discourage economically unproductive lending such as consumer credit and mortgage lending. Also consumer credit tends to be used by consumers to buy imported products whereas business loans tend to be domestic and lead to more domestic job creation [and/or capital investment in machinery] in order to increase production to earn more profit.

A government institution, usually a central bank, can lend money to financial institutions to influence their interest rates as the main tool of monetary policy. Usually central bank interest rates are lower than commercial interest rates since banks borrow money from the central bank then lend the money at a higher rate to generate most of their profit.

By altering interest rates, the government institution is able to affect the interest rates faced by everyone who wants to borrow money for economic investment. Investment can change rapidly in response to changes in interest rates and the total output.

Open Market Operations in the United States[edit]

The effective federal funds rate in the US charted over more than half a centuryThe Federal Reserve (often referred to as 'The Fed') implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates using the power to buy and sell treasury securities.

Money and inflation[edit]Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply.

By setting i*n, the government institution can affect the markets to alter the total of loans, bonds and shares issued. Generally speaking, a higher real interest rate reduces the broad money supply.

Through the quantity theory of money, increases in the money supply lead to inflation.

Impact on savings and pensions[edit]Financial economists such as World Pensions Council (WPC) researchers have argued that durably low interest rates in most G20 countries will have an adverse impact on the funding positions of pension funds as without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years [16]

From 1982 until 2012, most Western economies experienced a period of low inflation combined with relatively high returns on investments across all asset classes including government bonds. This brought a certain sense of complacency amongst some pension actuarial consultants and regulators, making it seem reasonable to use optimistic economic assumptions to calculate the present value of future pension liabilities...

This potentially long-lasting collapse in returns on government bonds is taking place against the backdrop of a protracted fall in returns for other core-assets such as blue chip stocks, and, more importantly, a silent demographic shock. Factoring in the corresponding "longevity risk", pension premiums could be raised significantly while disposable incomes stagnate and employees work longer years before retiring.[16]

Mathematical note[edit]Because interest and inflation are generally given as percentage increases, the formulae above are (linear) approximations.

For instance,

i_n = i_r + p_e\,\!is only approximate. In reality, the relationship is

(1 + i_n) = (1 + i_r)(1 + p_e)\,\!so

i_r = \frac {1 + i_n} {1 + p_e} - 1\,\!The two approximations, eliminating higher order terms, are:

\begin{align}(1+x)(1+y) &= 1+x+y+xy &&\approx 1+x+y\\\frac{1}{1+x} &= 1-x+x^2-x^3+\cdots &&\approx 1-x\end{align}The formulae in this article are exact if logarithmic units are used for relative changes, or equivalently if logarithms of indices are used in place of rates, and hold even for large relative changes. Most elegantly, if the natural logarithm is used, yielding the neper as logarithmic units, scaling by 100 to obtain the centineper yields units that are infinitesimally equal to percentage change (hence approximately equal for small values), and for which the linear equations hold for all values.

Zero interest rate policy[edit]Main article: Zero interest-rate policyA so-called "zero interest rate policy" is a very lownear-zerocentral bank target interest rate. At this zero lower bound the central bank faces difficulties with conventional monetary policy, because it is generally believed that market interest rates cannot realistically be pushed down into negative territory.

Negative interest rates[edit]Nominal interest rates are normally positive, but not always. Given the alternative of holding cash, and thus earning 0%, rather than lending it out, profit-seeking lenders will not lend below 0%, as that will guarantee a loss, and a bank offering a negative deposit rate will find few takers, as savers will instead hold cash.[17]

During the European sovereign-debt crisis, government bonds of some countries (Switzerland, Denmark, Germany, Finland, the Netherlands and Austria) have been sold at negative yields. Suggested explanations include desire for safety and protection against the eurozone breaking up (in which case some eurozone countries might redenominate their debt into a stronger currency).[18]

More often, real interest rates can be negative, when nominal interest rates are below inflation. When this is done via government policy (for example, via reserve requirements), this is deemed financial repression, and was practiced by countries such as the United States and United Kingdom following World War II (from 1945) until the late 1970s or early 1980s (during and following the PostWorld War II economic expansion).[19][20] In the late 1970s, United States Treasury securities with negative real interest rates were deemed certificates of confiscation.[21]

Negative interest rates have been proposed in the past, notably in the late 19th century by Silvio Gesell.[22] A negative interest rate can be described (as by Gesell) as a "tax on holding money"; he proposed it as the Freigeld (free money) component of his Freiwirtschaft (free economy) system. To prevent people from holding cash (and thus earning 0%), Gesell suggested issuing money for a limited duration, after which it must be exchanged for new bills; attempts to hold money thus result in it expiring and becoming worthless. Along similar lines, John Maynard Keynes approvingly cited the idea of a carrying tax on money,[22] (1936, The General Theory of Employment, Interest and Money) but dismissed it due to administrative difficulties.[23] More recently, a carry tax on currency was proposed by a Federal Reserve employee (Marvin Goodfriend) in 1999, to be implemented via magnetic strips on bills, deducting the carry tax upon deposit, the tax being based on how long the bill had been held.[23]

It has been proposed that a negative interest rate can in principle be levied on existing paper currency via a serial number lottery: choosing a random number 0 to 9 and declaring that bills whose serial number end in that digit are worthless would yield a negative 10% interest rate, for instance (choosing the last two digits would allow a negative 1% interest rate, and so forth). This was proposed by an anonymous student of N. Gregory Mankiw,[22] though more as a thought experiment than a genuine proposal.[24]

A much simpler method to achieve negative real interest rates and provide a disincentive to holding cash, is for governments to encourage mildly inflationary monetary policy; indeed, this is what Keynes recommended back in 1936.

Negative interest on central bank reserves[edit]Main article: Negative interest on excess reservesHowever, central bank rates can, in fact, be negative. Countries such as Sweden and Denmark have set negative interest on reservesthat is to say, they have charged interest on reserves.[25][26][27][28]

In July 2009, Sweden's central bank, the Riksbank, set its policy repo rate, the interest rate on its one week deposit facility, at 0.25%, at the same time as setting its overnight deposit rate at -0.25%.[29] The existence of the negative overnight deposit rate was a technical consequence of the fact that overnight deposit rates are generally set at 0.5% below or 0.75% below the policy rate.[29][30] This is not technically an example of "negative interest on excess reserves," because Sweden does not have a reserve requirement,[31] but imposing a reserve interest rate without reserve requirements imposes an implied reserve requirement of zero. The Riksbank studied the impact of these changes and stated in a commentary report[32] that they led to no disruptions in Swedish financial markets.

Documents

Financial Management System