The various types of interest rates

An interest rate is the price of money, i.e. the cost that must be paid for a loan or revenue that is earned from saving money, e.g. in a bank account.

Returns show how much a given interest rate will yield if interest is paid annually.

Penalty interest is interest calculated on payments in default, such as compensation to creditors for delayed payment.

The key interest rate is the interest rate of the Central Bank that is the most important determinants of other interest rates in the economy, such as on car loans or mortgages or interest on savings accounts. The key interest rate is also called the Central Bank's policy rate.

The overdraft rate is the interest charged on an overdrawn bank account and is calculated on the amount of the credit facility used at any given time.

The prime lending rate is the lowest lending rate offered by credit institutions. It is used when, in the credit institution’s assessment, risk is very limited or non-existent.

IKON (Icelandic króna overnight) is the interest rate on unsecured overnight (O/N) deposits denominated in Icelandic krónur, which the Central Bank calculates and publishes, and are held by entities subject to disclosure obligations.

The interest rate is calculated on the basis of agreements that financial institutions make with their customers when accepting overnight fixed-term deposits, unlike REIBOR rates, which are based on bids rather than on actual transactions.

REIBOR rates are rates on the interbank market for krónur. The market for krónur is also known as the REIBOR market, and interest rates in the market are called REIBOR rates. REIBOR is an abbreviation of Reykjavík Interbank Offered Rate.

A simple calculation of the real interest rate is the figure obtained by deducting the inflation rate from the nominal interest rate. Real interest rates are therefore interest rates that take account of changes in the general price level, i.e. the change in the purchasing power of money that bears a certain rate of interest.

With the Fisher equation it can be illustrated as follows: (1+r) = (1+i) / (1+π) where r represents the real interest rate, i represents the nominal interest rate, and π stands for inflation. The real interest rate is usually lower than the nominal rate by the amount of inflation.