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What determines the interest rate on your saving bond, mortgage or car loan? |
What determines the interest rate on your saving bond, mortgage or car loan? A combination of Federal rates: Federal Discount Rate, Ten Year Treasury Rates, Federal Long Term Bond Rates are the primary factors. lign="right" > Sign in to vote! Essentially all interest rates are set by the supply of money in circulation. In the United States, this supply is controlled by the central bank called the Federal Reserve. They control "monetary policy". Congress and the Prez control "fiscal policy" of the taxing and spending. If there is more supply of money, then interest rates are lower between the Federal Reserve and private banks. If money supply is tight, then interest rates are higher. This all gets passed down in different ways to the consumers in the form of loans and mortgages. econ 101 lign="right" > Sign in to vote! Rates on mortgages and car loans are determined based on the Federal Reserve internal lending rate. The Federal Reserve determines a rate that it uses to lend to member banks, and banks determine their lending rates to consumers at a slightly higher amount. (The federal lending rate is a tool for monetary policy to regulate the economy. It has a direct impact on the value of the dollar.) Bonds are different. Treasury bonds are sold by the federal government, and the health of the economy is used to determine the interest rate. When the government wants to sell more bonds, it raises the rate, when it wants to sell less, it lowers the rate. Corporate bond rates are determined according to the corporation's risk of doing business (the "beta" score). One way of doing it is to take the treasury bond rate and add to that a proportion of [market rate - treasury rate] based on the beta score. Another way of doing it is to get a company's Standard and Poor rating on the bonds and just use their risk rates. General Electric has a rating of AAA and will pay a very low bond rate. General Motors has a "junk bond" status and will pay a very high rate. lign="right" > Sign in to vote! |
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