Loan Modification

Well as a basic starting point, here’s some things which affect, or partially determine, the rate of interest:
The “base rate” of interest. Banks will often need to borrow money, at the “base rate” of interest, from the central bank of their economy in order to balance their books. Therefore, the “base rate” will affect the rates of interest offered to savers and borrowers.
Inflationary expectations can have an effect – the higher is anticipated inflation the greater is (nominal) rate of interest which will be expected in order for the investor to ensure that the real value of any returns is not eroded.
Risk is another key factor – risky investments generally yield a higher rate of interest. This is why shares, the return on which depends on the, potentially volatile, profit levels of a firm generally yield lower rates of interest than government bonds.
The price of bonds (£Pb) can also affect interest rates. Higher bond prices, in virtue of the definition of the interest rate (i), will mean lower rates of interest. For example, a bond promising £200 in 1 year will yield a certain rate of return. Since the bond in question is 1 year bond, this rate of return IS the (annual) interest rate. It can be mathematically expressed as:
(£200 – £Pb)/(£Pb) = i
Finally, the amount of money in circulation – the money supply – affects the rate of interest. This is best thought of in terms of demand and supply. Increased money supply will push down the rate of interest – basically the price of money falls as it becomes more plentiful, as you expect with any commodity. Additionally, banks, finding it easier to back their assets and maintain liquidity, will offer lower rates of interest on savings as they do not desperately need the cash in the their vaults (or on their computer screens!).
The interest rate can have a wide-ranging economic impact:
In order to hold money in a foreign bank account, you must usually convert your holdings into the currency of the economy within which you will hold your account. If, say, the rate of interest on savings deposits is higher in the US than the UK then UK savers would find it profitable to convert their savings into dollars and deposit them in a US account. This increases the demand for dollars and thus raises the price of the dollar relative to the pound. The pound depreciates against the dollar. The exact opposite case could be argued if the rate of interest on savings deposits was higher in the UK than the US.
Through this affect the interest rate can affect the balance of payments. As higher interest rates mean a higher exchange rate, they also mean a tough time for exporters, who find that the price of their produce (to potential buyers) is increased. This tends to cut demand for, and hence the volume of, an economies exports (X). Additionally, because of the strength of the domestic currency, imports (IM) become relatively cheaper and thus increase in volume. A worsening of the current account balance ensues (it becomes more negative); remember that AD = C + G + I + (X – IM). By the reverse argument, lower rates lead to more exports and less imports. Therefore, the current account balance improves (becomes more positive). The impact on the export market is crucial because the demand for and economies exports affects the viability of its domestic industry and thus has a bearing on the state of its labour market.
[of course all this assumes that the price elasticities of demand for both an economies exports and its imports are greater than 1 in absolute value].
The rate of interest can affect the rate of inflation. Higher rates tend to promote more borrowing and thus higher expenditure, leading to greater aggregate demand in the economy. This puts upwards pressure on prices. Lower rates tend to promote less borrowing and thus less expenditure, leading to less upwards pressure on aggregate demand. This helps to reduce inflationary pressure.
Sorry about the massive essay:P, hope it helps.
Iven