What considerations account for the fact that interest rates differ greatly on various types of loans? Explain with the following examples:a. A...

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Interest
rates are not constant for all loans that are given. They vary based on several factors.
A few of them are:

Risk of a default: When a loan is given,
the issuer has to keep in mind the risk of a default. To make up for any extra risk that
is involved is some cases, a higher rate of interest is charged. For example, in the
cases provided, a 10-year government bond is very secure and the person buying the bond
is assured of getting the interest on time and also getting back the principle. This
would make the interest rate here relatively low. Similarly in the case of a mortgage,
the bank has the house as a security, which it can sell if the loan is not repaid. An
automobile is also a security but the value of the automobile decreases as it is used.
This makes the interest rate lower for automobile higher the mortgage. Personal loans
and those given by the pawn broker have a high risk of default. This makes the interest
rate charged quite high.

Liquidity: The faster a loan is
repaid, the lesser is the profit that the issuer stands to make. To accommodate for
this, the interest rate will increase. A 30-year mortgage gives the issuer a long period
over which interest is collected compared to a 2- year loan for an automobile. The
interest rate for the car loan is likely to be higher than the
mortgage.

Costs involved: If the costs involved while
issuing the loan in checking on the current financial situation of the person taking the
loan, the credit history, cost of disbursement of funds and other similar factors is
higher, it reflects on the rate of interest. For example a person buying a government
bond does not have to spend as much effort in checking on the capability of the
government to pay back, while a personal finance company would have to put in more
effort analyzing the financial situation of the person the loan is being issued to. This
would make the interest rate on the bond lower than the rate on the personal
loan.