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The Types of Interest Rates

Ceiling Rates of Interest:

Ceiling rate is also the maximum rate of interest fixed by any authority. In India the ceiling rate is usually fixed by the Government of India and the Reserve Bank of India. Ceiling rate depends on the face value of a financial instrument and the rate is fixed according to the face value of an instrument.

The ceiling rate pervades a wide spectrum of the environment but usually does not include the market rate or yield rate. It may, therefore, be said that the market rate and the yield rate are independent of ceiling rates and are not subject to these restrictions.

2. Coupon Rate of Interest:

This is the rate of interest which is paid on the face value of a bond or a debenture. A person who purchases a long-term bond from a company or from a debenture expects an interest in the form of coupon.

3. Yield:

The yield indicates the present value of the future cash flows which is generated by an investment with the cost incurred on making such investment. It also includes the principal amount when the principal amount is repaid. The yield is also called the market rate of interest.

There are many kinds of yield such as:

Market Yield:

Market yield is also called current yield or running yield and represents the annual interest which is paid in proportion to the market price of a bond.

Yield to Maturity:

This yield is called redemption yield. This is the payment of an annual rate of interest and it also includes the average annual appreciation which arises out of difference between the face value of a bond and its purchase value. Sometimes, there may also be a depreciation in price rather than appreciation.

Dividend Yield:

This is the annual amount paid to the shareholders (gross of tax) in proportion to the current price of the share.

Earnings Yield:

Earnings yield represents the amount which is adjustable as earnings to shareholders of each share in proportion to the market price of their share. Yield may be gross yield or net yield. Gross yield is used to measure the cost of capital and net yield is used for finding out the effective rate of return for an investor. The investor is advised to carefully approach both gross and net yield of investment.

Maturity Date:

Interest may also be determined from the point of view of maturity date. Interest is usually paid on a long-term basis, for a medium-term and for a short period of time.

 4. Long-Term Interest:

Long-term interest rates comprise of a period usually above five years or above ten years.

 5. Medium-Term Interest:

Medium-term interest rates may vary from a period of one year to five years.

6. Short-Term Interest:

Short-term interest rates varies per day, per week, per month, per year and the maximum number of years for which it may be considered can be said to be three years. But three years is usually too long a period of time because short- term interest rates are extremely sensitive to changes in the capital market of a country.

The long-term and medium-term interest rates are said to be the interest paid on fixed deposits of banks, deposit rates, term loans, yield rates on government securities, debenture yield, the dividend paid by the Unit Trust of India on its units and the yields received by equity shareholders on their shares the short-term rates may be said to comprise of the bank rate interest, the treasury bill rate, the call money market rate, the short-term deposit rate, the commercial bill rate or the Hundi rate used by commercial organizations.

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