# 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.

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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.

List products people buy on credit…….

List products people buy on credit. Did you get these:-  Kitchens  Bathrooms  Carpets  Home improvements  Furniture  Cars  TVs

 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 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 £130 K 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 £130 K 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….

a Set by the Government so that it does not have to pay too much to borrow money b Set by a committee at the Bank of England to keep inflation within specified guidelines c Decided 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

a Set by the Government so that it does not have to pay too much to borrow money b Set by a committee at the Bank of England to keep inflation within specified guidelines X c Decided 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

a What will happen to the amount that people borrow? bWhat will happen to the amount that people save? c What will happen to the amount your business pays on its loans? d What 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

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 a What will happen to the amount that people borrow? It is likely to rise bWhat will happen to the amount that people save?It is likely to fall c What will happen to the amount your business pays on its loans? They will pay less d What will happen to the quantity of items your business sells? Answer depends on the business

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