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Question
Answer the following question.
What is Interest? Explain its features.
Solution
Meaning:
- Interest is a payment made for using the money from another person.
- The borrower takes money from the lender. Thus, for borrowers, interest is the cost of renting money and for the lender, interest is the income from his lending money.
- The company has to pay interest if it has borrowed money from creditors like Debentures holders, Depositors, Bondholders, etc.
Features:
- Interest is the price paid for the productive services rendered by capital.
- It is directly related to risk. The higher the risk, the higher is the interest.
- Rate of Interest is expressed as an annual percentage of Principal.
- The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
- Interest is a charge against the profit of the company. Even if the company makes no profit, interest should be paid.
- It is payable at a fixed and generally pre-determined rate.
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______ is a return paid to creditors by the company.
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____________ Final Dividend.
Answer in one sentence.
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Dividend is an obligation to be paid by a company every year.
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Interest is a liability/obligation of the company.
The reward given for the use of capital
What do you mean by interest?
