# This lesson we will be learning about Interest Rates - PowerPoint PPT Presentation

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This lesson we will be learning about Interest Rates. What is the current base rate?. NO IDEA I NEED HELP NEVER HEARD OF IT. OK I CAN DO THIS WITH SUPPORT SOME GUIDANCE NEEDED NEARLY AT MY TARGET. GOT IT! VERY CONFIDENT WILL HIT MY TARGET GRADE. EXCEED TARGET. LEARNING OBJECTIVES

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This lesson we will be learning about Interest Rates

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## This lesson we will be learning aboutInterest Rates

What is the current base rate?

NO IDEA

I NEED HELP

NEVER HEARD OF IT

OK

I CAN DO THIS WITH SUPPORT

SOME GUIDANCE NEEDED

NEARLY AT MY TARGET

GOT IT!

VERY CONFIDENTWILL HIT MY TARGET GRADE

EXCEED TARGET

• LEARNING OBJECTIVES

• To understand that interest is the payment made for a loan/received for savings.

• To understand how changes in interest rates can affect small businesses

### What are interest rates?

Interest is the price that has to be paid for borrowing money

The interest rate shows the amount of money that has to be paid to borrow that sum of money

The higher the interest rate the more that has to be paid back.

COST to borrowers (interest charged)

1,000 pound loan 15% interest = 150 pounds a year

REWARD to savers (interest added to savings)

Interest rates affects:

-Overdraft facilities (short term cash flow problems)

-Loans (long term finance e.g. new machinery/ expansion)

HANDOUT

### Who sets interest rates?

Bank of England – central bank (banker to all banks)

The MPC (Monetary Policy Committee) meets each month to establish the interest rate to charge to all banks (known as the base rate)

This rate affects the rate individual banks loan to us the public (it will reflect the rate they are charged by the Bank of England).

If the bank reduces its rate will it make borrowing cheaper or more expensive for us?

Cheaper

### Who sets interest rates?

Bank of England – central bank (banker to all banks)

The MPC (Monetary Policy Committee) meets each month to establish the interest rate to charge to all banks (known as the base rate)

This rate affects the rate individual banks loan to us the public (it will reflect the rate they are charged by the Bank of England).

If the bank reduces its rate will it make borrowing cheaper or more expensive for us?

Cheaper

### Fixed and Variable Rates

Variable Interest Rates – they change each month (they reflect the changes with the base rate). If a business borrows money on a variable rate it is difficult for them to establish the exact cost of borrowing.

Fixed Interest Rates – This means the interest on the loan does not change whilst the loan is being repaid. Less risky

### Consider the following……….

• How do interest rates affect consumers?

• Why might a consumer have a loan?

• What kind of products do consumers borrow money to purchase?

• Will these type of firms see a drop in sales if interest rates increase?

• Are consumers more likely to borrow money if interest rates are low?

### Markets that suffer in sales if interest rates increase

• Cars

• Housing developers

• Kitchen

• Furniture

• Holidays

These are products that are bought on credit/ with a loan

### Businesses are affected by interest rates in 2 ways

• If they have loans (repayments)

• Consumer spending decisions are influenced by interest rates (affects their disposable income and willingness to take out loans purchase products)

These notes are very important for the exam!

## TEST YOURSELF

### Test Yourself

1.8% of 1,000 = 80 pounds

10% of 1,000= 100 pounds

Difference – 20 pounds

C

• B

• B

Sales will increase because it costs less to borrow

More interest on savings

## Homework – Due Wednesday

Find out 5 different forms of ownership

(with a brief description of each)

### Over to you

• Fall in spending / less customers buying their products; this is because these are expensive products that are generally bought on credit / via a loan. The increase in interest rates will make it more expensive to borrow money therefore less customers will be likely to buy these products

• Increase in interest paid on the loan and overdraft

• Sale – increase sales in the short term. Not a long term solution.

• Students opinion must be justified!!!

20/ 25 minutes

21 marks in total

### Results Plus – 5 minutes

C & E

Please note that A and F are the same answer in the book – it will not be this answer due to it being a fixed rate loan

## Starter: Name as many types of ownership that you can think of…..

There are 7 possible types

Can you think of them all

### What is limited liability?

Limited Liability is when shareholders of a company are not personally liable for the debts of the company; the most they can lose is the value of their investment in the shares of the company.

• Owned, financed and controlled by one individual but can employ other staff

• Common in local building firms, small shops, restaurants, butchers, etc.

• Easy to set up

• Personal incentive –

• keep all the profits

• make key decisions

• high degree of control

• Flexibility

• Ability to offer personal service

• Unlimited Liability

• Potential for long hours

• Pressure of being solely responsible

• Lack of continuity – business ceases once owner dies

### Sole trader - Limited Liability

• Sole Traders have unlimited liability

• Whereby owners are responsible for paying the debts.

## Partnerships

### Definition

• ‘A partnership is a type of business entity in which partners share with each other the profits or losses of the business’.

• Shared responsibility

• Businesses decisions shared

• Allows for specialisation

• More people to contribute financially

• Less pressure of time on individuals

• Unlimited Liability (in most cases)

• Disputes arise over decisions

• Distribution of profits and work

### Partnership - Liability

Unlimited Liability

The partners are personally liable for the debts of the company.

## Limited Companies

### Definition: Limited Company

• ‘A limited company in the United Kingdom is a corporation whose liability is limited by law’

• Types:

• Public Limited Company (Plc)

• Private Limited Company (Ltd)

### Public Limited Companies (Plc)

Minimum owners is 2

Minimum investment is £50,000

Owners are shareholders (public)

Run by a board of directors

Owners have limited liability

Business affairs are public

Shares are only sold to public on the stock exchange

Finance is raised by selling more shares in the stock exchange to public

Business scale is large

### Private Limited Companies (Ltd)

• Minimum 2 owners

• No minimum investment

• Owners are shareholders (family and friends)

• Runners are the board of directors

• Owners/shareholders have limited liability

• Business affairs are more private than a PLC

• Shares are only sold to family and friends

• Finance is raised by selling more shares for family and friends, government grant or borrowing

• Business scale is medium/large

• Businesses which end in Ltd, co or sons are generally private limited companies (look on yell.co.uk)

### Limited Companies - Liability

Limited Liability

The board of directors/shareholders of a company are not legally liable for the debts of the company.

They can only loose the value of their shares.