From the financial markets point of view the interest rate can be considered as the price of money. This makes the interest rate a very important instrument for efficient financial markets performance and a vital tool of the government's economic management. The control of interest rates is passed over to the Central Bank. There are many different interest rates. Interest rates will vary according to the amount of time money is tied up for and the riskiness of the investment. The actual interest rate depends on a number of factors. These include: The length of time for which the money is borrowed (or saved); the security of the loan (or investment); the nature of the financial institution the money is borrowed from (or lent to); the amount of competition between financial institutions. Changes in interest rates affect different aspects of the economy (growth, prices, employment, spending, etc.). That is the interest rate transmission mechanism: One of the peculiarities of the money market is its way of quoting interest rates. Some money market instruments (treasury bills, commercial paper, and bankers' acceptances) are quoted on a discount basis. Other rates (fed funds, federal reserve discount rate, and repo rates) are quoted on an add-on basis. Each of these rates is different from the yield to maturity, the rate generally used for comparing coupon-bearing bonds. There are at least five different money market rates: the discount rate, the add-on rate, the bond equivalent yield, and the semi-annual and annual yields to maturity. Both nominal and real interest rates differ by maturity or term.

A schedule of spot interest rates by maturity is called the term structure of interest rates. The term structure can be rising, flat, declining or humped. Bonds and other debt instruments have varying degrees of default risk, and the yields on these instruments reflect the market's assessment of this default risk. The relationship among these interest rates is called the risk structure of interest rates.

While borrowing money, it is the percentage over and above the original loan that has to be paid back. This makes the interest rate a very important instrument for efficient financial markets performance and a vital tool of economic management. A large amount of economic activity (both consumption and investment) is done on borrowed money via financial markets, and so if the interest rate is changed, it will either encourage or discourage borrowing and therefore tend to increase or decrease economic growth.

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