Interest

It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.

[5] The argument that acquired seeds and animals could reproduce themselves was used to justify interest, but ancient Jewish religious prohibitions against usury (נשך NeSheKh) represented a "different view".

[9] In the early 2nd millennium BC, since silver used in exchange for livestock or grain could not multiply of its own, the Laws of Eshnunna instituted a legal interest rate, specifically on deposits of dowry.

In the medieval economy, loans were entirely a consequence of necessity (bad harvests, fire in a workplace) and, under those conditions, it was considered morally reproachable to charge interest.

[citation needed] It was also considered morally dubious, since no goods were produced through the lending of money, and thus it should not be compensated, unlike other activities with direct physical output such as blacksmithing or farming.

Medieval jurists developed several financial instruments to encourage responsible lending and circumvent prohibitions on usury, such as the Contractum trinius.

In the Renaissance era, greater mobility of people facilitated an increase in commerce and the appearance of appropriate conditions for entrepreneurs to start new, lucrative businesses.

On the question of why interest rates are normally greater than zero, in 1770, French economist Anne-Robert-Jacques Turgot, Baron de Laune proposed the theory of fructification.

In total, the investor therefore now holds: and so earns a coupon at the end of the next 6 months of: Assuming the bond remains priced at par, the investor accumulates at the end of a full 12 months a total value of: and the investor earned in total: The formula for the annual equivalent compound interest rate is: where For example, in the case of a 6% simple annual rate, the annual equivalent compound rate is: The outstanding balance Bn of a loan after n regular payments increases each period by a growth factor according to the periodic interest, and then decreases by the amount paid p at the end of each period: where By repeated substitution, one obtains expressions for Bn, which are linearly proportional to B0 and p, and use of the formula for the partial sum of a geometric series results in A solution of this expression for p in terms of B0 and Bn reduces to To find the payment if the loan is to be finished in n payments, one sets Bn = 0.

In the age before electronic computers were widely available, flat rate consumer loans in the United States of America would be priced using the Rule of 78s, or "sum of digits" method.

[18] In 1992, the United States outlawed the use of "Rule of 78s" interest in connection with mortgage refinancing and other consumer loans over five years in term.

Each specific debt takes into account the following factors in determining its interest rate: Opportunity cost encompasses any other use to which the money could be put, including lending to others, investing elsewhere, holding cash, or spending the funds.

Charging interest equal to inflation preserves the lender's purchasing power, but does not compensate for the time value of money in real terms.

Since the lender is deferring consumption, they will wish, as a bare minimum, to recover enough to pay the increased cost of goods due to inflation.

Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates.

Lando (2004), Darrell Duffie and Singleton (2003), and van Deventer and Imai (2003) discuss interest rates when the issuer of the interest-bearing instrument can default.

All else equal, an investor will want a higher return on an illiquid asset than a liquid one, to compensate for the loss of the option to sell it at any time.

Aristotle and the Scholastics held that it was unjust to claim payment except in compensation for one's own efforts and sacrifices, and that since money is by its nature sterile, there is no loss in being temporarily separated from it.

Schumpeter[26][page needed] considered Hume's theory superior to that of Ricardo and Mill, but the reference to profits concentrates to a surprising degree on 'commerce' rather than on industry.

[30] Individuals lend in order to defer consumption or for the sake of the greater quantity they will be able to consume at a later date owing to interest earned.

But so long as the investment schedule is almost vertical, a change in income (leading in extreme cases to the broken red saving curve) will make little difference to the interest rate.

In the case of extraordinary spending in time of war the government may wish to borrow more than the public would be willing to lend at a normal interest rate.

If the dotted red curve started negative and showed no tendency to increase with r, then the government would be trying to buy what the public was unwilling to sell at any price.

Eugen Böhm von Bawerk and other members of the Austrian School also put forward notable theories of the interest rate.

The doyen of the Austrian school, Murray N. Rothbard, sees the emphasis on the loan market which makes up the general analysis on interest as a mistaken view to take.

For instance, the 15th-century commentator Rabbi Isaac Abrabanel specified that the rubric for allowing interest does not apply to Christians or Muslims, because their faith systems have a common ethical basis originating from Judaism.

[44] The first of the scholastic Christian theologians, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft.

The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as "montes pietatis".

The Congregation of the Missionary Sons of the Immaculate Heart of Mary, a Catholic Christian religious order, teaches that:[44] It might initially seem like little is at stake when it comes to interest, but this is an issue of human dignity.

Charging interest is indeed sinful when doing so takes advantage of a person in need as well as when it means investing in corporations involved in the harming of God's creatures.