# Types of Interest Rates

Interest rates are how we measure the time value of money. While making an investment, an investor will need to know the interest rate that the investment will earn. The interest rates can be interpreted in many ways.

Required Rate of Return

Required rate of return is the minimum return that an investor demands for a specific asset based on its riskiness. This is the minimum interest rate at which investors will be willing to invest or lenders will be willing to lend their money.

Opportunity Cost

The required rate of return also reflects the opportunity cost of forgoing the next best investment. Opportunity cost is what a person sacrifices when he chooses one option over the other. Say you decided to spend the money (current consumption). If investing that money instead of consuming earned you an interest rate of 6%, then 6% is the opportunity cost.

Discount Rate