Definition: What a lender charges someone who borrows its money for one year, expressed as a percentage of the amount borrowed.

Example: Carlyle wants to put an extension on his home. Estimates he has received from contractors show that it will cost him $50,000. A bank agrees to lend him the money at an interest rate of 7%. If Carlyle borrows and spends all $50,000 and doesn’t pay any back, at the end of a year he’ll owe the bank interest of $50,000 * 7%, or $3,500.

Investeach explains: An interesting way to look at interest is as the cost of “renting” someone else’s money. A person who rents an apartment uses it during the term of the agreement and then returns it when the agreement expires. Similarly, a person who takes a loan uses someone else’s money for a period of time and returns it when the loan’s term ends.

The interest rate that one person charges another is directly related to the risk that the person borrowing the money won’t be able to pay it back. The greater the risk, the higher the interest rate that will be demanded by the lender.

Corporations and governments collectively borrow trillions of dollars by issuing of bonds, each of which specifies an interest rate.

Riddle me this:

1. How is interest expressed?
2. What period of time does the interest cost cover?
3. What is the relationship between the riskiness of the borrower and the rate a lender will charge him?