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Borrowing and lending in the financial market
depend to a significant extent on the rate of
interest. In economics interest is a payment for
the services of capital. It represents a return on
capital.
Interest is the price of hiring capital. Capital,
as a factor of production, takes the form of
machinery, equipment or any other physical
assets used in production of goods.
On the other hand, funds must be made
available to the entrepreneurs for buying these
physical assets. Purchase of capital assets is
called investment and funds made available for
the purchase of such capital assets is called
financial capital. Some persons have to supply
this financial capital to the entrepreneurs who
would use it for investment in real capital
assets.
Market rate of interest
The payment to those who supply financial
capital for its use is called the market rate of
interest. This is expressed as a percentage of
sum of funds borrowed.
Return on capital