Interest:
"Interest is the price paid by the
borrower to the lender for the use of borrowed funds during a
certain period".
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"The interest earned on a deposit or
security before the deduction of tax".
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If pure interest is calculated
over the same period of time in the same money market, it will
tend to be the same. It can, however, differ in different
markets on account of the following reasons.
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We have
discussed in above, the three reasons which cause variations in
the rate of pure interest. These causes are also applicable for
explaining the difference in gross interest rates in addition to
these the following two factors also influence the gross
interest.
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There are various theories which have been put forward from time to time as
to why the interest is paid. The most important theories are:
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