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Video #2: What causes interest rates to change? 

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Video #2: What causes interest rates to change? 

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This video describes the factors that cause interest rates to fluctuate and why they cause them to change.

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Video #3: Why do interest rates change? 

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Video #3: Why do interest rates change? 

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Changing interest rates is directly related to inflation. in this article it describes in detail how inflation affects interest rates and why they change.

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This graph shows the trend in Canadian interest rates over the last   years.

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Website #2: Bank of Canada: Interest Rates

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Website #2: Bank of Canada: Interest Rates

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The bank of Canada describes in detail the interest rate policy and how the rates affect the economy.

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A History of the Key Interest Rate

Over the years, the Bank of Canada has adjusted the way it sets its key interest rate. Following is a brief history of the key rate from the Bank's founding in 1935 until the present.

Bank Rate

March 1935 to November 1956
The original key interest rate was the Bank Rate. This is the minimum rate of interest that the Bank of Canada charges on one-day loans to financial institutions. Between March 1935 and November 1956, the Bank Rate was fixed, set directly by the Bank.

November 1956 to June 1962
The Bank Rate became a floating rate, set at 25 basis points above the average yield on 3-month treasury bills at the federal government's weekly auction.

June 1962 to March 1980
The Bank Rate was again fixed, set directly by the Bank.

March 1980 to February 1996
The Bank Rate was returned to a floating rate, set at 25 basis points above the average yield on 3-month treasury bills at the federal government's weekly auction.

22 February 1996 to Present
Since 1996, the Bank Rate has been set by the Bank at the top of its operating band for the overnight rate (see next column.) This provides a clearer indicator of monetary policy intentions, because the Bank's influence on the overnight rate is more direct than on 3-month treasury bill rates.

December 2000
The Bank began setting the level of the Bank Rate-and with it, the target for the overnight rate-oneight fixed dates per year.

From the Bank Rate to the "Target for the Overnight Rate"

June 1994
The Bank began shifting emphasis from the Bank Rate to the target for the overnight rate as its key monetary policy instrument.

This shift followed the Bank's introduction of a 50-basis-point "operating band" for the overnight rate, which is the rate at which major participants in the money market borrow and lend one-day (or overnight) funds among themselves.

At that time, the Bank used daily adjustments in the level of settlement balances to set a "target level" for the overnight rate within the operating band. Specifically, the Bank would intervene with PRA and SPRA when the overnight rate hit the top or bottom of the operating band.

February 1999
With the advent of the Large Value Transfer System (LVTS), the target for the overnight rate was defined as the midpoint of the band, or 25 basis points below the Bank Rate.

The shift in emphasis toward the target for the overnight rate was clearly communicated to the markets with the launch of the LVTS.

May 2001
The Bank began emphasizing the target as its key interest rate in its communications with the public.

Because the target affects the interest rates that financial institutions charge each other from day to day, it usually affects other interest rates, such as mortgages and consumer loans.

The target for the overnight rate is also the most appropriate policy rate for international comparisons; for example, with the target for the federal funds rate in the United States and with the two-week repo rate in the United Kingdom.

Implementation of Fixed Announcement Dates

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Over the years, the Bank of Canada has adjusted the way it sets its key interest rate. Following is a brief history of the key rate from the Bank's founding in 1935 until the present. March 1935 to November 1956 The original key interest rate was the Bank Rate.

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This video explains what an interest rate is in a short descriptive video using a realistic example that us as students can directly relate to.

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Interest Rates | by Wall Street Survivor

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Website #3: How interest rates effects the economy

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Website #3: How interest rates effects the economy

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This is a link to a video about a news report talking about how the US interest rate is effecting the Canadian economy. The article the video is attached in goes more into depth about what the effects this will have on the economy.

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For the first time in a year, the U.S. Federal Reserve has h iked its key rate by a quarter of a percentage point to 0.75 per cent, fuelled by strong economic growth. This stands in contrast to the Bank of Canada's decision to hold its rate at 0.5 per cent, amid sluggish growth.
READ MORE: Here's why oil prices, the Canadian dollar and stock markets are all up
Wednesday's hike had already been priced into the market, said TD Bank Group deputy chief economist Derek Burleton. That means there shouldn't be any dramatic reactions, but there will be ripple effects.

Here's how the rate hike could be felt in Canada.

Loonie

In general, a Fed rate hike will see the U.S. dollar strengthen, and that tends to dampen the loonie.

"The Canadian dollar is at risk of decline, the U.S. dollar could strengthen, but my hunch is we're not looking at any large market movements," said Burleton.

What this hinges on is the indication of how many rate hikes the Federal Reserve has in store for next year. There are four opportunities a year to raise the rate.
READ MORE: What President Donald Trump will mean for Canada
"If they signal fewer than four and the U.S. dollar goes down, then the loonie could take off," said Colin Cieszynski, chief market strategist at CMC Markets Canada.

The suggestion of fewer hikes next year could be due, in part, to a wait-and-see approach by the Fed, hinging on President-elect Donald Trump's plans for stimulus projects next year.

"My best guess is the Fed takes a cautious approach," said Burleton.
WATCH: How Trump's win could impact your mortgage
Oil prices

The price of oil is unlikely to see much movement, said Burleton, due in large part to its current surge thanks to news of a deal to cut production globally.
READ MORE: Oil cuts spur optimism in Canadian oilpatch after 2-year slump
However, "if the U.S. dollar goes up, all things equal, that tends to pull down oil prices," said Burleton.
WATCH: What an OPEC oil production agreement means for Canada
Interest rates

The Bank of Canada has held off on raising its key interest rate, and while there won't be a knee-jerk reaction to the Fed's decision, it does send things on an upward trend.

"Canada may not necessarily come under pressure to follow the Fed in raising rates, but it certainly discourages the Bank of Canada from cutting rates," said Cieszynski.

We're unlikely to see a rate change unless Canada's economy suddenly kicks into high gear - which would increase the pressure to raise rates, Cieszynski said. Should there be a major emergency (such as a U.S.-style housing crisis), we could see rates drop in order to stimulate growth.
READ MORE: 'Sudden' spike in interest rates could trigger housing crash, unemployment spike: CMHC
However, the days of rock-bottom interest rates are pretty much behind us.

"In general I think what we've seen is, we've reached the end of this big long monetary easing cycle, low-interest rates cycle, in some places negative interest rates," said Cieszynski. "We're slowly starting to go back the other way."

This should carry a note of caution for Canadians, as the debt-to-income ratio continues to see record highs.

Mortgage rates

As interest rates rise, so do mortgage rates.

"If interest rates around the world start to rise, then that could put pressure on the banks to raise mortgage rates at some point," said Cieszynski.
READ MORE: Here's how much mortgage payments will go up as banks hike rates
We've already seen mortgage rates in Canada start to creep up, a trend that is unlikely to reverse.

WATCH: Homebuyers and owners brace for rising mortgage rates

The federal government has put new measures in place to protect against a sudden rate increase triggering a devastating housing market correction.

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How a US interest rate hike affects Canadians, oil and the loonie

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For the first time in a year, the U.S. Federal Reserve has h iked its key rate by a quarter of a percentage point to 0.75 per cent, fuelled by strong economic growth. This stands in contrast to the Bank of Canada's decision to hold its rate at 0.5 per cent, amid sluggish growth.

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In this article it discuses in detail what an interest rate is. To briefly explain and interest rate is the percentage of the amount of money charged to borrow money.

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What is 'Interest Rate'

Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, and large assets such as a vehicle or building.

BREAKING DOWN 'Interest Rate'

Interest is essentially a rental, or leasing charge to the borrower, for the use of an asset. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the lease rate. When the borrower is a low-risk party, s/he will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.

In terms of borrowed money, the interest rate is typically applied to the principal, which is the amount of money lent. The interest rate is the cost of debt for the borrower and the rate of return for the lender.

Interest rates are applied in numerous situations where lending and borrowing is concerned. Individuals borrow money to purchase homes, fund projects, start businesses, pay college tuition, etc. Businesses take loans to fund capital projects and expand their operations by purchasing fixed and long-term assets such as land, buildings, machinery, trucks, etc. The money that is lent has to be repaid either in lump sum at some pre-determined date or in monthly installments, which is usually the case. The money to be repaid is usually more than the borrowed amount since lenders want to be compensated for their loss of use of the money during the period that the funds are loaned out; the lender could have invested the funds instead of lending them out. With lending a large asset, the lender may have been able to generate income from the asset should they have decided to use it themselves. The difference between the total repayment sum and the original loan is the interest charged. The interest charged is an interest rate that is applied on the principal amount.

For example, if an individual takes out a $300,000 mortgage from the bank and the loan agreement stipulates that the interest rate on the loan is 15%, this means that the borrower will have to pay the bank the original loan amount of $300,000 + (15% x $300,000) = $300,000 + $45,000 = $345,000. If a company secures a $1.5 million loan from a lending institution that charges it 12%, the company must repay the principal $1.5 million + (12% x $1.5 million) = $1.5 million + $180,000 = $1.68 million.

Simple Interest Rate

The examples presented above are calculated based on the annual simple interest formula, which is:

Simple Interest = Principal x Interest Rate x Time

The individual that took out a mortgage will have to pay $45,000 in interest at the end of the year, assuming it was only a one-year lending agreement. If the term of the loan was for 20 years, the interest payment will be:

Simple Interest = $300,000 x 15% x 20 = $900,000

An annual interest rate of 15% translates into an annual interest payment of $45,000. This means that after 20 years, the borrower would have made $45,000 x 20yrs = $900,000 interest payments. Now you get a sense of how banks make their money.

Compound Interest Rate

But banks almost never charge simple interest. They prefer the compound interest method which means that the borrower pays even more in interest. Compound interest, also called interest on interest, is interest rate that is not only applied on the principal, but also on accumulated interest of previous periods. The bank assumes that at the end of the first year, the borrower owes it the principal plus interest for that year. The bank also assumes that at the end of second year, the borrower owes it the principal plus the interest for the first year plus the interest on interest for the first year.

The interest owed when compounding is taken into consideration is higher than that of the simple interest method, because interest has been charged monthly on the principal including accrued interest from the previous months. For shorter time frames, the calculation of interest will be similar for both methods. As the lending time increases, though, the disparity between the two types of interest calculations grows.

Following our mortgage example above, the table below is an illustration of how compound interest works.

At the end of 20 years, the interest owed will be almost $5 million on a $300,000 loan. A simpler method of calculating compound interest by using the formula:

Compound Interest = Principal x [(1 + interest rate) n - 1], where n is the number of compounding periods.

When an entity saves money using a savings account, compound interest is favorable. Interest that is earned on these accounts are compounded and is compensation to the account holder for allowing the bank use the funds deposited. If a business deposits $500,000 into a high-yield savings account, the bank can take $300,000 of these funds to loan the mortgagor in the example above. To compensate the business, the bank pays 6% interest into the account annually. So, while the bank is taking 15% from the borrower, it is giving 6% to the business account holder, that is, the bank's lender, netting it 9% in interest. In effect, savers lend the bank money which, in turn, lends borrowers the money in return for interest.
[ The snowballing effect of compounding interest rates, even when rates are at rock bottom, can still help you build wealth over time. Investopedia Academy's Personal Finance for Grads course will teach you how to grow your nest egg from best places to put your savings to tips on how to make your wealth last. Over 2 hours of video, interactive lessons and articles curated to help you take control over your finances. ]
APR vs APY

Interest rates on consumer loans are typically quoted as Annual Percentage Rate (APR). This is the rate of return that lenders demand for borrowing their money. Example, the interest rate on credit cards is quoted as an APR. In our example above, 15% is the APR to the mortgagor. The APR does not take compounding o interest for the year into account.

The Annual Percentage Yield (APY) is the interest rate that is earned at a bank or credit union from a savings account or certificate of deposit (CD). This interest rate takes compounding into account, and thus, tells the consumer or business what it is really earning by saving money.

Cost of Debt

While interest rates represent interest income to the lender, it constitute a cost of debt to the individual and business. Companies weigh the cost of borrowing against the cost of equity, such as dividend payments, to determine which source of funding will be the least expensive. Since most companies fund their capital from either taking on debt and/or issuing equity, the cost of the capital is evaluated in order to achieve an optimal capital structure.

Interest Rate Drivers

The interest rate charged by banks is determined by a number of factors, including the state of the economy. The interest rate in the economy is set by a country's central bank. When the central bank sets interest rates at a high level, the cost of debt rises, discouraging people from borrowing and slowing consumer demand. Furthermore, interest rates tend to rise when - inflation goes up, higher reserve requirements for banks are set, tight money supply ensues, or there is greater demand for credit. In a high interest rate economy, people resort to saving their money since they receive more from the savings rate. The stock market tends to suffer as well since investors would rather take advantage of the higher rate from savings than the lower returns from the stock market. Businesses also have limited access to capital funding through debt, which leads to a contraction in the economy.

During periods of low interest rates, the economy is stimulated as borrowers have access to loans at inexpensive rates. Since interest rates on savings are low, businesses and individuals are more likely to spend more and purchase riskier investment vehicles, such as stocks. This fuels spending in the economy and capital markets, leading to an economy expansion. While a government will prefer interest rates to be low, low interest rates eventually lead to a market disequilibrium in which demand rises higher than supply, causing inflation. When inflation arises, interest rates increase.

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Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, and large assets such as a vehicle or building.

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On this padlet topics that will be discussed are as followed:
- what an interest rate is
- what causes them to rise and fall
- how they effect the economy

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Interest Rates and How They Effect the Economy By: Madison Langlois 

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Interest Rates and How They Effect the Economy By: Madison Langlois 