In plain English
What Interest rate means
Interest rates appear in many forms: a central bank’s policy rate, overnight interbank rates, government-bond yields, deposit rates, and loan rates. They are related but not interchangeable. In forex, markets often compare expected rates and yields across two currencies, because those expectations can affect capital flows and the relative appeal of currency-denominated assets.
Why it matters
Changes in actual or expected interest rates can affect exchange rates, bond prices, share valuations, and CFD overnight financing. A policy-rate change may alter market rates quickly, but the pass-through to households, businesses, and brokers is neither automatic nor identical across products. Rate expectations can move prices before a decision occurs.
Example
A simplified one-year loan of $10,000 at a 5% simple annual interest rate produces $500 of interest for the year: $10,000 × 0.05. The total due is $10,500, ignoring fees, compounding, taxes, and any early repayment terms. Actual loan disclosures can use different calculation conventions.
Quick answers
Common questions
What is the difference between an interest rate and a bond yield?+
An interest rate is a broad borrowing or lending price. A bond yield is the return implied by a bond’s market price, coupon, and maturity. Bond yields can change continuously even when a central bank’s policy rate does not.
Why do relative interest rates matter in forex?+
Currency values reflect many factors, but investors often compare expected returns on assets in different currencies. The expected difference in rates can affect hedging costs, capital flows, and the pricing of forward foreign-exchange contracts.
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