What are interest rates?

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Interest rates, however, are important to understand because of their profound effects on your stock portfolio and your ability to buy a house. This impact is so significant that the chairman of the Fed Reserve is probably the second most powerful person in the country after the President.

Interest rates generally refer to the general level of interest that a borrower has to pay a lender to borrow a certain amount of money for a certain amount of time. These rates refer to all sorts of loans, ranging from ones companies take to buy new machines, to ones you or I would take to buy a new house. Although these loans can be used by very different borrowers for very different purposes, their overall levels generally rise and fall together. Think of a rising tide lifting all boats in the water, regardless of whether it’s a tanker or a rowboat. Intuitively, high interest rates dissuade people from borrowing because it becomes more expensive to do so.

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