Why are there different interest rates on loans and securities?

What will be an ideal response?

Answer: Different interest rates exist to reflect the different risks and times for repayment. For example, it usually costs more to borrow for a car than to borrow for a house. In the case of the house, the lender is safer because house prices (in the old days at least!) usually went up, and so in the event of default the lender could just foreclose on the house, sell it, and get back the value of the loan. A car, however, usually depreciates, so foreclosing on a bad car loan does not get all the bank's money back. Another major reason interest rates differ is the time factor. For example, usually longer-term certificates of deposit pay higher interest rates—you'll earn a higher interest rate on a 24-month CD than on a 12-month CD. People usually want to borrow for long periods and lend for short periods. This leads to the imbalance in the demand and supply for short- and long-term loans, which in turn causes longer-term loans to offer higher rates.