ABSTRACT
This chapter discusses the nature of interest, its causes, the manipulation of interest by central banks, and its role in the valuation of assets. Interest income can be seen as a participation of savers in the income of borrowers. If savers deposit more funds than borrowers demand at a given interest, the rate of interest declines to restore equilibrium between saving and borrowing. In the neoclassical extension of classical theory of interest the supply of and demand for savings capital are explained in more detail. The classical and neoclassical theories of interest neglect the credit market and money. If the interest rate rises from a to c, the triangle becomes steeper and the number of stages of production declines. The change of the market price in reaction to a change in the interest rate is called "duration". A credit of longer duration ties up the money lent for some time and hence is supposed to fetch a low liquidity premium.
