Fixed and Floating/Fluctuating Interest Rates

Fixed Interest Rate

A loan can either have a floating interest rate or a fixed interest rate. For instance, when the loan has a fixed interest rate, it means that the duration of the loan, the interest remains constant. A fixed interest rate entails that the loan is repaid in equal proportions or installments within the specified fixed period (Brown, 2016). Unlike floating interest rates, fixed interest rates are priced much higher. Fixed interest rates are advantageous as compared to floating interest rates because they eliminate uncertainties. This is so because once the loan is finalized, then the value of the future installments is known. A borrower benefits from a fixed interest rate if the market rates are higher than the fixed rates. In this case, the lender suffers implicit losses. In cases where the market rates fall significantly below the fixed rates then the lender attains implicit gains at the expense of the borrower who suffers implicit losses. A major drawback of the fixed interest rate is that the rates are higher than those rates of the floating interest rates. Ideally, fixed interest rates are 1%-2.5% higher as compared to the floating interest rates.

Floating/Fluctuating Interest Rates

Floating interest rates are those rates which are volatile and keep on changing depending on the market scenario. Floating interest rates fluctuate throughout the loan period. Floating rates keep on changing with the overall markets with prime rates. The decrease and increase of varying interest rates are somewhat temporary, and they fluctuate according to the market trends (Bahar, 2017). Because of the low-interest rates, the floating interest rates are becoming popular among home buyers. Floating interest rates also known as the variable interest rates are advantageous the rates move with the market rates and trends. The floating interest rates have lower interest rates, and this attracts many borrowers. Even if the floating interest rate increases, the interest rates will still be lower than those of the fixed rates previously offered. A drawback of the floating interest rate is that due to the fluctuating nature of the fluctuating interest rate, monthly installments will be uneven. This means that loan repayments during the loan tenure will vary. Again, in a floating interest rate, it is somewhat hard to budget for a loan because of the uneven monthly installments involved. Floating rates are suitable to individuals with little knowledge about market rates and want to stick to their current market rates.

How foreign exchange rate is determined when dealing with business implications

The foreign exchange rate is the rate at which currency of a particular country is converted into another. The rate of exchange fluctuates daily due to variation in market forces of demand and supply. There are factors which determine the foreign exchange rate and respective implications on business performance in general.

Inflation rates: Variation in market inflations influences change in currency exchange rates. According to Li, & Wang, (2017), a country with a low level of inflation rate has a high ability to experience appreciation in the value of their currency. At lower inflation rate the price of commodities increases at a lower rate. Based on the analysis of Li, & Wang, (2017) a country that has consistently lower inflation rate tend to exhibit a high value of the currency.

Interest rates: Fluctuations in the interest rate affect the exchange rate and value of the currency. Inflation, interest rates and forex rates are correlated. When the country increases the inflation rate, it causes its currency to appreciate. Therefore interest rates are used in determining the value of the currency hence fixing exchange rate prices.

Currency’s current account/ balance of payments: It reflects the number of transactions such as imports, exports, debts and total earning from foreign exchange trade. The balance of payment is used to determine the exchange rate of currency on foreign trade and domestic price in the respective countries.

Government debts: It is a national debt or public debt owned by the central government. The country with huge foreign debts is likely to experience a low exchange rate in their currency due to the inflation rate. Foreign investors sell their bonds in open markets hence making the value of the currency to reduce.

Terms of trade: It is related to the balance of payment of the country. It implies the ratio of export prices to import prices. The country with higher exports than imports is likely to have a high value of their currency. If the export price of a country rises, then it causes the value of its currency to increase hence cause appreciation in the exchange rate.

Political stability and performance: Political instability affect the stability of the currency strength than a country with good political stability. The investors are scared to invest in a country which experiences political unrest at all time. Increase in foreign capital influence the appreciation of the local currency.  Countries with sound

Recession: Any country which suffers recession will result in a fall of interest rate hence decreases the chance of acquiring foreign capital. Therefore the increase in demand for currency causes its value to rise.

Conversion of currency

$1000 to Euros = 890.134 Euros

The chart provides a critical analysis of the fluctuations of the exchange rate on the stock market. It implies that the exchange rate for currency are never constant but fluctuates depending on prevailing market conditions.

References

Bahar, E. (2017). The effects of real exchange rate volatility on sectoral investment:         Empirical evidence from fixed and flexible exchange rate systems. Routledge.

Brown, P. (2016). What now for fixed interest?. Superfunds Magazine, (418), 37.

Li, X., & Wang, C. A. (2017). The technology and economic determinants of cryptocurrency       exchange rates: The case of Bitcoin. Decision Support Systems, 95, 49-60