Interest is the price paid for the utilization of capital. This is ‘total interest’ or ‘pure interest’. A good illustration of pure interest is the interest we acquire on some government securities. It might be regarded as total interest. Gross interest, comprises besides total interest, other things like reward for risk, remuneration for inconvenience and payment for services. Therefore gross interest covers trade and personal risks. For illustration, whenever a money lender lends money to a farmer, he charges high rate of interest since there is the risk of non-payment of the amount borrowed. There are trade and personal risks. Usually, people prefer to contain cash balances. This is termed as liquidity preference. Whenever you lend money to someone, you can’t get it for some time. And that is inconvenience. Therefore to compensate it, one should be paid some extra income. Therefore, gross interest comprises compensation for all the above things besides total interest.
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