<p>Interest rates are not to be <em>directly</em> considered as the price of credit. Instead, they are unequivocally linked to it. This is simply due to <a href="https://en.wikipedia.org/wiki/Bond_valuation" rel="nofollow noreferrer">how bonds are priced</a>.</p>

<p><span class="math-container">$$
P = \sum_{n=1}^N \frac{C + M[{I_{n=N}}]}{(1+i)^n}
$$</span></p>

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

<p>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.</p>

CC BY-SA 4.0
2019-09-10T07:41:37.270Z
2019-09-10T07:48:41.090Z
2019-09-10T07:48:41.090Z
keepAlive
<p>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?</p>

<interest-rate><money>
Interest rate - Price of Credit vs Price of Money
Rumi
# Interest rate - Price of Credit vs Price of Money

(Asked by: username_0 on 2019-09-10)

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?

**Tags:** interest-rate, money


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## 1 answers

### Answer by username_1 on 2019-09-10. Score: 0 | Accepted answer

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](https://en.wikipedia.org/wiki/Bond_valuation).

$$
P = \sum\_{n=1}^N \frac{C + M[{I\_{n=N}}]}{(1+i)^n}
$$

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.


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