Unit 1
Topic 1.5.2
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Must learn: What are interest rates
Should learn: What is the purpose of interest
rates
Could learn: What are the effects of changing
interest rates on businesses and consumer
spending
Write a few
sentence
explaining what
you think are
interest rates.
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http://www.tes.co.uk/teachingresource/Interest-rates-6173309/
http://www.bbc.co.uk/news/business12416255
List products people buy on credit…….
List products people buy on credit.
Did you get these:
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
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Kitchens
Bathrooms
Carpets
Home improvements
Furniture
Cars
TVs

The cost of borrowing
The reward for saving

Eg interest rate of 5% pa (per annum):

◦ Borrow £100
◦ pay back £100 x 5% one year later
◦ £150.00
◦ Save £100
◦ One year later savings are worth £100 x 5%
◦ £150.00
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Jane takes out a one year loan of £1000
Interest rate = 7% per annum
How much does she pay back?
Fred puts his retained profit of £500 in a
savings account
Interest rate = 1% per annum
How much are his savings worth after a year?
How a Bank Loan works
£100K for 5 yrs @ 10%
Total
How a Bank Loan works
£100K for 5 yrs @ 10%
£20K
Every year
Repay part of the loan
£20K
£20K
£20K
£20K
Total
How a Bank Loan works
£100K for 5 yrs @ 10%
£20K + £10K
Every year
Repay part of the loan
+
Interest
Total
£30K
How a Bank Loan works
£100K for 5 yrs @ 10%
Every year
£20K + £10K
£30K
£20K + £8K
£28K
Repay part of the loan
+
Interest
Total
How a Bank Loan works
£100K for 5 yrs @ 10%
Every year
Repay part of the loan
£20K + £10K
£30K
£20K + £8K
£28K
£20K + £6K
£26K
+
Interest
Total
How a Bank Loan works
£100K for 5 yrs @ 10%
Every year
Repay part of the loan
+
£20K + £10K
£30K
£20K + £8K
£28K
£20K + £6K
£26K
£20K + £4K
£24K
Interest
Total
How a Bank Loan works
£100K for 5 yrs @ 10%
£20K + £10K
£30K
£20K + £8K
£28K
£20K + £6K
£26K
+
£20K + £4K
£24K
Interest
£20K + £2K
£22K
Total
£130K
Every year
Repay part of the loan
How a Bank Loan works
£100K for 5 yrs @ 10%
£20K + £10K
£30K
£20K + £8K
£28K
£20K + £6K
£26K
+
£20K + £4K
£24K
Interest
£20K + £2K
£22K
Total
£130K
Every year
Repay part of the loan
So taking a loan means paying interest
How a Bank Loan works
£100K for 5 yrs @
15%
£100K for 5 yrs @
10%
£20K +
£15K
£20K +
£12K
£35K £20K +
£30K
£10K
£32K £20K + £8K £28K
£20K +
£9K
£20K +
£6K
£29K £20K + £6K £26K
£20K +
£3K
£23K £20K + £2K £22K
Total
£145K
£26K £20K + £4K £24K
Total
£130
K
How a Bank Loan works
£100K for 5 yrs @ 5%
£20K + £5K
£25K
£20K + £4K
£24K
£20K + £3K
£23K
£20K + £2K
£22K
£20K + £1K
Total
£100K for 5 yrs @
15%
£100K for 5 yrs @
10%
£20K +
£15K
£20K +
£12K
£35K £20K +
£30K
£10K
£32K £20K + £8K £28K
£20K +
£9K
£20K +
£6K
£29K £20K + £6K £26K
£21K
£20K +
£3K
£23K £20K + £2K £22K
£115K
Total
£145K
£26K £20K + £4K £24K
Total
£130
K
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Jack’s savings of £5,000 are in a savings
account which pays 2% per annum. What are
her savings worth at the end of a year?
Emily’s mortgage interest rate increases by 1%
per annum. How much extra does she have to
pay per year on a mortgage of £100,000?
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Jane borrows £500 for six months at an
interest rate of 4% per annum. How much does
she pay back?
Mitchell’s two year loan has an interest rate of
8% per annum. How much interest does he
have to pay on a loan of £10,000?
Interest rates go up
…………………………..
……………………………
Interest rates go up….
... businesses will
have to pay more
interest on their
loans.
This means that their costs will increase and
may lead to profits falling.
…so borrowing is
more expensive for
consumers.
This might hurt businesses which rely on
consumers who buy on credit. An example
might be car sales.
…so some
consumers might
decide to save rather
than spend.
This might be bad news for some businesses
which sell goods which consumers don’t need
to have urgently e.g. a new set of living room
furniture
…people who have
mortgages have to
pay more.
This would give them less disposable income to
spend on other goods and services.
[The effect might be delayed if they have a fixed
rate mortgage]
Interest rates go down
…………………………..
…
…………………………
Interest rates go down….
... businesses will
have to less more
interest on their
loans.
…so borrowing is
cheaper for
consumers.
…so some
consumers might
decide to spend
rather than save.
…people who have
mortgages have to
pay less.
Plenary
The rate of interest in the UK is:
(indicate the correct definition by a
cross in the box)
Set by the Government so that it does not have to pay
a
too much to borrow money
Set by a committee at the Bank of England to keep
b
inflation within specified guidelines
Decided by the European Central Bank to keep the Euro
c
stable
Plenary
The rate of interest in the UK is:
(indicate the correct definition by a
cross in the box)
Set by the Government so that it does not have to pay
a
too much to borrow money
Set by a committee at the Bank of England to keep
b
X
inflation within specified guidelines
Decided by the European Central Bank to keep the Euro
c
stable
Homework
Summary
It is very useful to learn the ways in which changing interest rates
affect a business. See if you can fill in the spaces below looking at the
impact on your business of a fall in interest rates.
a
What will happen to the amount that people
borrow?
b What will happen to the amount that people save?
c
What will happen to the amount your business
pays on its loans?
d
What will happen to the quantity of items your
business sells?
Homework - Answers
Summary
It is very useful to learn the ways in which changing interest rates
affect a business. See if you can fill in the spaces below looking at the
impact on your business of a fall in interest rates.
a
What will happen to the amount that people
borrow?
b What will happen to the amount that people save?
c
What will happen to the amount your business
pays on its loans?
What will happen to the quantity of items your
d
business sells?
It is likely to
rise
It is likely to fall
They will pay
less
Answer
depends on the
business