Theories of Interest
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Indian Economy and Indian Financial System — JAIIB.
One-liners from this chapter
Free sample — 8 of 55 rapid-fire Q&A cards.
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.
What does the service charge component pay for?
The cost of evaluating, monitoring and recovering the loan, i.e. the cost of intermediation.
What does pure interest pay for?
The time-value of money itself - the cost of postponing consumption.
What is the current Repo Rate per the June 2026 MPC?
5.25%.
Who propounded the Liquidity Preference Theory and in which work?
John Maynard Keynes, in his 1936 book The General Theory of Employment, Interest and Money.
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