Financial Terms
Interest on interest

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Definition of Interest on interest

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Interest on interest

interest earned on reinvestment of each interest payment on money invested.
See: compound interest.

Related Terms:

Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).

Accrued Interest

The amount of interest accumulated on a debt security between
interest paying dates

Accrued Interest

The amount of interest owing but not paid.

Amortizing interest rate swap

Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).


An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

Automatic Benefits Payment

Automatic payment of moneys derived from a benefit.

Balance of payments

A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.

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Balance of Payments

The difference between the demand for and supply of a country's currency on the foreign exchange market.

Balance of Payments Accounts

A statement of a country's transactions with other countries.

Base interest rate

Related: Benchmark interest rate.

Benchmark interest rate

Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.

Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Capitalized interest

interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.

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Capitalized Interest

interest incurred during the construction period on monies invested in
assets under construction that is added to the cost of the assets.

Cash flow after interest and taxes

Net income plus depreciation.

Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for payment Clearing Services (APACS).

Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.

Compound interest

interest paid on previously earned interest as well as on the principal.

Compound Interest

interest paid on principal and on interest earned in previous

compound interest

a method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest

compound interest

interest earned on interest.

Compound Interest

interest earned on an investment at periodic intervals and added to principal and previous interest earned. each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.

Compound option

Option on an option.


The process of accumulating the time value of money forward in time. For example, interest
earned in one period earns additional interest during each subsequent time period.

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When an asset generates earnings that are then reinvested and generate their own earnings.

Compounding frequency

The number of compounding periods in a year. For example, quarterly
compounding has a compounding frequency of 4.

Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.

compounding period

the time between each interest computation

Continuous compounding

The process of accumulating the time value of money forward in time on a
continuous, or instantaneous, basis. interest is earned continuously, and at each instant, the interest that
accrues immediately begins earning interest on itself.

Continuous Compounding

The process of continuously adding interest to a principal plus
interest amount and calculating the resulting compound amount

Coupon payments

A bond's interest payments.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for

Current Tax Payment Act of 1943

A federal Act requiring employers to withhold income taxes from employee pay.

Daily Interest Accumulation

Account in which interest is accrued daily and credited to the account at the end of a specified time.

Date of payment

Date dividend checks are mailed.

Delivery versus payment

A transaction in which the buyer's payment for securities is due at the time of
delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be
made by bank wire, check, or direct credit to an account.

Discrete compounding

compounding the time value of money for discrete time intervals.

Discrete Compounding

The process of adding interest to a principal plus interest amount
and calculating the resulting compound amount at specific
intervals, such as monthly or annually

Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the

earned income

earned income is generally an individual's salary or wages from employment. It also includes some taxable benefits. earned income also includes business income if the individual is self-employed. earned income is used as the basis for calculating RRSP maximum contribution limits.

earnings before interest and income tax (EBIT)

A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expenses—but before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.

Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

Earnings before interest and taxes (EBIT)

The operating profit before deducting interest and tax.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.

Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of

effective annual interest rate

interest rate that is annualized using compound interest.

Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.

Electronic Federal Tax Payment Systems (EFTPS)

An electronic funds transfer system used by businesses to remit taxes to the government.

Equilibrium rate of interest

The interest rate that clears the market. Also called the market-clearing interest

FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.

Fiat Money

Fiat money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.

Fixed Interest Rate

A rate that does not fluctuate with general market conditions.

Floating Interest Rate

A rate that fluctuates with general market condition.

Forward interest rate

interest rate fixed today on a loan to be made at some future date.

fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.

Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.

Gross interest

interest earned before taxes are deducted.

Guaranteed Interest Annuity (GIA)

interest bearing investment with fixed rate and term.

Guaranteed Interest Certificate (GIC)

interest bearing investment with fixed rate and term.

High-Powered Money

See money base.

Hot money

money that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.


A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money
by $0.50 an ounce.
Related: put.

Insurable Interest

In England in the 1700's it was popular to bet on the date of death of certain prominent public figures. Anyone could buy life insurance on another's life, even without their consent. Unfortunately, some died before it was their time, dispatched prematurely in order that the life insurance proceeds could be collected. In 1774, English Parliament passed a law which restricted the right to be a beneficiary on a life insurance contract to those who would suffer an economic loss when the life insured died. The law also provided that a person has an unlimited insurable interest in his own life. It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy is issued. Life Insurance companies will not, however, issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a windfall for the beneficiary.

Interac® Direct Payment

Instead of paying with cash or a credit card, Interac Direct payment allows you to pay for your purchase with a debit card, such as your bank card. The amount of the purchase is electronically debited, or withdrawn, from your bank account (see debit card).
Here's how to pay for items using Interac Direct payment and your bank account:
1. Swipe your bank card (or debit card) through the point of sale (POS) terminal at the store's check-out
2. Enter your personal identification number (PIN), confirm the amount to be paid and indicate the account (chequing) from which the money is to be drawn.
3. The specified amount is then electronically debited from your account.


The price paid for borrowing money. It is expressed as a percentage rate over a period of time and
reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.


The cost of money, received on investments or paid on borrowings.


The cost of funds loaned to an entity. It can also refer to the equity ownership
of an investor in a business entity.


A charge for the use of money supplied by a lender.


The cost of a loan or the compensation paid for the use of money. For example, you are paid interest for deposits you make into a savings account, and you pay interest for money that you borrow from a low-cost borrowing account.

Interest coverage ratio

The ratio of the earnings before interest and taxes to the annual interest expense. This
ratio measures a firm's ability to pay interest.

Interest coverage test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's
interest coverage would, as a result of the issue, fall below some specified minimum.

Interest equalization tax

Tax on foreign investment by residents of the U.S. which was abolished in 1974.

Interest Factor

Numbers found in compound interest and annuity tables. Usually called the FVIF or PVIF.

Interest income

Income that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies.

Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.

Interest Option

One of several investment accounts in which your premiums may be invested within your life insurance policy.

Interest payable

The amount of interest that is owed but has not been paid at the end of a period.

Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest Rate

Cost of using money, expressed as a rate per period of time, usually one year.

Interest Rate

Rate charged or paid for the use of money, normally expressed as a percentage

Interest rate agreement

An agreement whereby one party, for an upfront premium, agrees to compensate the
other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined
level (the strike rate).

Interest rate cap

Also called an interest rate ceiling, an interest rate agreement in which payments are made
when the reference rate exceeds the strike rate.

Interest rate ceiling

Related: interest rate cap.

Interest Rate Differential

The interest rate on our financial assets minus the interest rate on a foreign country's financial assets.

Interest rate floor

An interest rate agreement in which payments are made when the reference rate falls
below the strike rate.

Interest Rate, Nominal

payment for the use of borrowed funds, measured as a percentage per year of these funds.

Interest rate on debt

The firm's cost of debt capital.

interest rate parity

Theory that forward premium equals interest rate differential.

Interest Rate Parity

Theory that real interest rates are approximately the same across countries except for a risk premium.

Interest rate parity theorem

interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.

Interest Rate, Real

Nominal interest rate less expected inflation.

Interest rate risk

The risk that a security's value changes due to a change in interest rates. For example, a
bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in interest rates.

Interest Rate Risk

Possibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing.

Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

Interest subsidy

A firm's deduction of the interest payments on its debt from its earnings before it calculates
its tax bill under current tax law.







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