Advantages and Disadvantages of Higher Interest Rates on Investments - Essay Example

This means an immediate positive effect on investment is experienced. To the economy, it increases the savings account of individuals and also contributes to the rate of family income. Secondly, the increase in interest rate has an effect on bond debt. When interest rate rises, after bonds are issued, bond prices fall. The government can use this strategy to buy back bonds, hence retire debt and free money in their budget to devote to other projects. The interest rate also affects risk aversion.

When the interest rate is high, returns from normal savings cushions against riskier investments. The effect of this leads to more investors willing to work with these rates of return. Interest rates also affect equities, rising rate brings about higher borrowing costs, and this consequently impacts on the ability to spend. (Frankel, 2003) On the other hand, a disadvantage is that when interest rates are high, the following disadvantages are experienced. These occur in order to balance out the change.

First, it is expensive to borrow money, hence less money is available to buy goods. In effect, this will slow the growth rate of an economy. The high-interest rate can have effect on the stock market since less money is borrowed, the quantity of goods available from traders is less as they cannot afford to make more purchases. Loan borrowing by businesses is also reduced due to the cost incurred in borrowing. The high-interest rate also has a negative effect on credit cards, companies using credit cards will raise their rates respectively in order to balance with the interest rate changes (Frankel, 2003).