An interest rate is the percentage of principal charged by a lender to a borrower for the use of assets, typically expressed on an annual basis. It is commonly applied to loans, mortgages, bonds, savings accounts, and other financial products.

Key points about interest rates include:

1. **Borrowing Cost**: Interest rates represent the cost of borrowing money for the borrower. Lenders charge interest to compensate for the risk of lending money, the opportunity cost of tying up funds, and the effects of inflation.

2. **Types of Interest Rates**:
– **Nominal Interest Rate**: Also known as the stated interest rate, it is the rate before adjusting for inflation. It represents the actual dollar amount of interest payable over a year per dollar of principal borrowed.
– **Real Interest Rate**: This is the nominal interest rate adjusted for inflation. It indicates the purchasing power gained or lost from investing or borrowing money.
– **Effective Interest Rate**: This is the actual interest rate paid or earned on an investment, taking into account compounding over a given period.

3. **Influence on Economic Activity**: Interest rates play a significant role in influencing economic activity. Lower interest rates encourage borrowing and spending, stimulating economic growth and investment. Higher interest rates have the opposite effect, often leading to reduced borrowing and spending to control inflation.

4. **Central Bank Policy**: Central banks, such as the Federal Reserve in the United States or the European Central Bank in the Eurozone, set monetary policy by adjusting interest rates. They use interest rate changes to manage inflation, economic growth, and employment levels.

5. **Fixed vs. Variable Rates**: Interest rates can be fixed or variable. Fixed rates remain constant over the life of a loan or investment, providing certainty to borrowers or investors. Variable rates, on the other hand, fluctuate based on changes in market interest rates or benchmark rates such as the prime rate or LIBOR.

6. **Credit Risk**: Lenders adjust interest rates based on the creditworthiness of borrowers. Borrowers with higher credit scores typically receive lower interest rates because they pose lower credit risk. Conversely, borrowers with lower credit scores may face higher interest rates to compensate for the increased risk of default.

7. **Impact on Investments**: Interest rates affect the returns on investments such as bonds, savings accounts, and certificates of deposit. When interest rates rise, bond prices typically fall, and vice versa. Higher interest rates can also increase the return on savings accounts and other fixed-income investments.

Overall, interest rates are a fundamental aspect of the financial system, influencing borrowing costs, investment decisions, and economic activity. Changes in interest rates have far-reaching effects on individuals, businesses, governments, and financial markets.