If you were given a choice of paying £30 for a paintball game today or on the Halloween of 2016, you would probably opt for Halloween 2016. While your more snobbish friends might attribute this to your uncompromising thriftiness, a smarter argument would be that the value of that £30 is much greater today than it would be a year from now, hence making greater sense to delay payment as much as possible; a strategy most of us have barefacedly employed, especially as far as student life is concerned.

The reason this phenomenon takes place is interest rates. Interest rates allow me to discount a future value which is greater than the principal I hold now. There are numerous interest rates in the economy and they mostly differ on the basis of the risk attached to them. For instance if I’m a bank and am to lend £10,000 to two different consumers, Mrs. A who is a millionaire and has never defaulted on her payments and Mrs. B who is a retired professor dependent entirely on her alcoholic son with a gambling addiction and a fascination towards cannabis. As Mrs. A has more credibility I would loan her this £10,000 at a 4% annual interest rate while I might charge Mrs. B (a shrewd banker wouldn’t grant the loan in the first place but then history has consistently proven there aren’t many around) let’s say 5.5-6% annually owing to her unstable income stream.

Traditionally speaking Treasury bills (maturity less than a year), treasury notes (maturity 2-10 years) and treasury bonds (maturity over 10 years) are the safest investments as they are backed by the full faith and credit of the U.S. government. The risk of default on these fixed-income securities is zero. A company can become bankrupt but Uncle Sam can always go back and print more green paper to repay its people. Not even the safest corporate bond in the world can match that if you’re a risk averse investor. Amongst them, treasury bills are the safest investment as they mature in less than a year, and we all know the quicker we get our payment back the better because with time comes uncertainty and hence greater risk. Of course T-bills are not completely secure as they might give a return of say, 3.5% but inflation could be around 4%, hence eroding the real gain on your investment but that’s still better than simply stuffing it all away in a Swiss locker and praying you do not get caught.

Different interest rates are all tied to the federal funds rate, which is simply the rate at which depository institutions (e.g. Banks), trade balances held at the Federal Reserve with each other, usually overnight and without any collateral attached. Institutions with surplus balances in their accounts actively lend to those in need of credit. The federal fund rate is one of the most important benchmarks of the financial markets and its impact is clearly explained by An Li Xu in her article ((http://www.thelondonglobalist.org/what-happens-if-the-us-federal-reserve-raises-the-interest-rate/).