I read somewhere that interest rate as the price of money is wrong but rather it is the price of credit. Can someone elaborate and explain what this means?


1 Answer 1


Interest rates are not to be directly considered as the price of credit. Instead, they are unequivocally linked to it. This is simply due to how bonds are priced.

$$ P = \sum_{n=1}^N \frac{C + M[{I_{n=N}}]}{(1+i)^n} $$

Where $i$ is the contractual interest rate, $C$ is the coupon payment, $N$ is the number of payments, $I_{n=N}$ is an indicator function taking the value of $1$ when $n=N$ is $true$ or $0$ otherwise, $P$ is the market price of the bond, $M$ is the value of the bond at maturity.

In a second time, there is a link between money and credit, but indeed, transitively saying that interest rates are "the price of money" is a bit simplistic since it omits a great part of institutional and financial mechanisms.

  • 1
    $\begingroup$ Thank you. That was very well put. $\endgroup$
    – Rumi
    Sep 10, 2019 at 13:36

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