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Theories of Interest
What is interest?
The price paid by a borrower for the use of money belonging to another party for a defined period.
Which two macroeconomic schools built the theoretical foundation of interest determination?
John Maynard Keynes and the duo of Sir John Hicks and Alvin Hansen.
What are the three components hidden inside every quoted interest rate?
Risk premium, service charge, and pure interest.
What does the risk premium component pay for?
The credit risk in lending - default risk, country risk and liquidity risk.
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