Unit 1 Topic 1.5.2

Must learn: What are interest rates

Should learn: What is the purpose of interest rates

Could learn: What are the effects of changing interest rates on businesses and consumer spending

Write a few sentence

explaining what you think

are interest rates.

http://www.tes.co.uk/teaching-resource/Interest-rates-6173309/

http://www.bbc.co.uk/news/business-12416255

List products people buy on credit…….

List products people buy on credit.Did you get these:-

KitchensBathroomsCarpetsHome improvementsFurnitureCarsTVs

The cost of borrowing The reward for saving

Eg interest rate of 5% pa (per annum):◦ Borrow £100 ◦ pay back £100 x 5% one year later◦ £150.00

◦ Save £100◦ One year later savings are worth £100 x 5%◦ £150.00

Jane takes out a one year loan of £1000 Interest rate = 7% per annum How much does she pay back?

Fred puts his retained profit of £500 in a savings account

Interest rate = 1% per annum How much are his savings worth after a

year?

£100K for 5 yrs @ 10%

Total

How a Bank Loan works

£100K for 5 yrs @ 10%

£20K

£20K

£20K

£20K

£20K

Total

How a Bank Loan works

Every year

Repay part of the loan

£100K for 5 yrs @ 10%

£20K + £10K £30K

Total

How a Bank Loan works

Every year

Repay part of the loan

+

Interest

£100K for 5 yrs @ 10%

£20K + £10K £30K

£20K + £8K £28K

Total

How a Bank Loan works

Every year

Repay part of the loan

+

Interest

£100K for 5 yrs @ 10%

£20K + £10K £30K

£20K + £8K £28K

£20K + £6K £26K

Total

How a Bank Loan works

Every year

Repay part of the loan

+

Interest

£100K for 5 yrs @ 10%

£20K + £10K £30K

£20K + £8K £28K

£20K + £6K £26K

£20K + £4K £24K

Total

How a Bank Loan works

Every year

Repay part of the loan

+

Interest

£100K for 5 yrs @ 10%

£20K + £10K £30K

£20K + £8K £28K

£20K + £6K £26K

£20K + £4K £24K

£20K + £2K £22K

Total £130K

How a Bank Loan works

Every year

Repay part of the loan

+

Interest

£100K for 5 yrs @ 10%

£20K + £10K £30K

£20K + £8K £28K

£20K + £6K £26K

£20K + £4K £24K

£20K + £2K £22K

Total £130K

How a Bank Loan works

Every year

Repay part of the loan

+

Interest

So taking a loan means paying interest

£100K for 5 yrs @ 15%

£100K for 5 yrs @ 10%

£20K + £15K

£35K £20K + £10K

£30K

£20K + £12K

£32K £20K + £8K £28K

£20K + £9K

£29K £20K + £6K £26K

£20K + £6K

£26K £20K + £4K £24K

£20K + £3K

£23K £20K + £2K £22K

Total £145K Total £130K

How a Bank Loan works

£100K for 5 yrs @ 5% £100K for 5 yrs @ 15%

£100K for 5 yrs @ 10%

£20K + £5K £25K £20K + £15K

£35K £20K + £10K

£30K

£20K + £4K £24K £20K + £12K

£32K £20K + £8K £28K

£20K + £3K £23K £20K + £9K

£29K £20K + £6K £26K

£20K + £2K £22K £20K + £6K

£26K £20K + £4K £24K

£20K + £1K £21K £20K + £3K

£23K £20K + £2K £22K

Total £115K Total £145K Total £130K

How a Bank Loan works

Dilesh’s savings of £5,000 are in a savings account which pays 2% per annum. What are her savings worth at the end of a year?

Fatima’s mortgage interest rate increases by 1% per annum. How much extra does she have to pay per year on a mortgage of £100,000?

Jane borrows £500 for six months at an interest rate of 4% per annum. How much does she pay back?

Kwan’s two year loan has an interest rate of 8% per annum. How much interest does he have to pay on a loan of £10,000?

Interest rates go up

…………………………..

……………………………

... businesses will have to pay more interest on their loans.

This means that their costs will increase and may lead to profits falling.

…so borrowing is more expensive for consumers.

This might hurt businesses which rely on consumers who buy on credit. An example might be car sales.

…so some consumers might decide to save rather than spend.

This might be bad news for some businesses which sell goods which consumers don’t need to have urgently e.g. a new set of living room furniture

…people who have mortgages have to pay more.

This would give them less disposable income to spend on other goods and services.[The effect might be delayed if they have a fixed rate mortgage]

Interest rates go up….

Interest rates go down

…………………………..

……………………………

... businesses will have to less more interest on their loans.

…so borrowing is cheaper for consumers.

…so some consumers might decide to spend rather than save.

…people who have mortgages have to pay less.

Interest rates go down….

aSet by the Government so that it does not have to pay too much to borrow money

bSet by a committee at the Bank of England to keep inflation within specified guidelines

cDecided by the European Central Bank to keep the Euro stable

The rate of interest in the UK is: (indicate the correct definition by a cross in the box)

Plenary Plenary

aSet by the Government so that it does not have to pay too much to borrow money

bSet by a committee at the Bank of England to keep inflation within specified guidelines

X

cDecided by the European Central Bank to keep the Euro stable

The rate of interest in the UK is: (indicate the correct definition by a cross in the box)

Plenary Plenary

aWhat will happen to the amount that people borrow?

b What will happen to the amount that people save?

cWhat will happen to the amount your business pays on its loans?

dWhat will happen to the quantity of items your business sells?

Summary

It is very useful to learn the ways in which changing interest rates affect a business. See if you can fill in the spaces below looking at the impact on your business of a fall in interest rates.

Homework Homework

Summary

It is very useful to learn the ways in which changing interest rates affect a business. See if you can fill in the spaces below looking at the impact on your business of a fall in interest rates.

Homework - Answers Homework - Answers

aWhat will happen to the amount that people borrow?

It is likely to rise

b What will happen to the amount that people save? It is likely to fall

cWhat will happen to the amount your business pays on its loans?

They will pay less

dWhat will happen to the quantity of items your business sells?

Answer depends on the business