Up to this point in the course, I've actually talked quite a bit about of

interest rates and how they affect investment.

But I have not really defined the term.

Let's do that formally now.

[MUSIC]

Put simply, interest is the payment made for the use of money.

And it is often called the price of money.

[MUSIC]

As for the rate of interest, in this key definition,

the interest rate is defined as the amount of interest paid per unit of

time expressed as a percentage of the amount borrowed.

And you repeat that, the interest rate is the amount of interest paid

per unit of time expressed as a percentage of the amount borrowed.

For example, you made deposit $2,000 in a savings account

at your local bank with the rate of interest is 4% per year.

at the end of the year the bank will pay $80 of interest in to your account,

and your deposit will be worth $2, 080.

[MUSIC]

Economics textbooks often speak of the interest rates.

But in today's complex financial systems, there's really a vast array of interest

rates that are associated with an equally vast array of long types and instruments.