A theory of interest should explain two things:
(a) How interest arises and (b) how the rate of interest is determined, Some theories of interest explain only one of these aspects whereas others explain both. For instance, Productivity Theory, Abstinence or Waiting Theory, Ago Theory and Fisher’s Time Preference Theory are all classical theories which explain only why interest arises or why interest is paid. On the other hand, the Classical Theory, the Loadable Funds Theory and Liquidity Preference Theory explain both how interest arises as well as how the rate of interest is determined. We now start the discussion of the theories of interest with the first set of theories which explain how interest arises or why interest is-paid,