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Interest Rate |
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Definition of Interest RateInterest RateCost of using money, expressed as a rate per period of time, usually one year. Interest Raterate charged or paid for the use of money, normally expressed as a percentage
Related Terms:Amortizing interest rate swapSwap in which the principal or national amount rises (falls) as interest rates Base interest rateRelated: Benchmark interest rate. Benchmark interest rateAlso called the base interest rate, it is the minimum interest rate investors will Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of Forward interest rateinterest rate fixed today on a loan to be made at some future date. Interest rate agreementAn agreement whereby one party, for an upfront premium, agrees to compensate the Interest rate capAlso called an interest rate ceiling, an interest rate agreement in which payments are made Interest rate ceilingRelated: interest rate cap. Interest rate floorAn interest rate agreement in which payments are made when the reference rate falls Interest rate on debtThe firm's cost of debt capital. Interest rate parity theoreminterest rate differential between two countries is equal to the difference Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest rate swapA binding agreement between counterparties to exchange periodic interest payments on Nominal interest rateThe interest rate unadjusted for inflation. Real interest rateThe rate of interest excluding the effect of inflation; that is, the rate that is earned in terms Spot interest rateinterest rate fixed today on a loan that is made today. Related: forward interest rates. Stated annual interest rateThe interest rate expressed as a per annum percentage, by which interest Effective Interest RateThe rate of interest actually earned on an investment. It is Nominal Interest RateThe rate of interest quoted, or stated, to be paid on a security Real Interest RateThe rate of interest paid on an investment adjusted for inflation effective annual interest rateinterest rate that is annualized using compound interest. interest rate parityTheory that forward premium equals interest rate differential. nominal interest raterate at which money invested grows. real interest raterate at which the purchasing power of an investment increases. Interest Rate DifferentialThe interest rate on our financial assets minus the interest rate on a foreign country's financial assets. Interest Rate, NominalPayment for the use of borrowed funds, measured as a percentage per year of these funds. Interest Rate ParityTheory that real interest rates are approximately the same across countries except for a risk premium. Interest Rate, RealNominal interest rate less expected inflation. Term Structure of Interest RatesRelationship among interest rates on bonds with different terms to maturity. Fixed Interest RateA rate that does not fluctuate with general market conditions. Floating Interest RateA rate that fluctuates with general market condition. Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing. Nominal Interest RateThe contracted, or stated, interest rate, undeflated for price level changes. tiered interest rateA pre-set scale of interest which is based on the premise that higher sums of money earn higher rates of interest. Equilibrium rate of interestThe interest rate that clears the market. Also called the market-clearing interest Rate of interestThe rate, as a proportion of the principal, at which interest is computed. Money Rate of InterestSee interest rate, nominal. Real Rate of InterestSee interest rate, real. ARMAdjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate Asset swapAn interest rate swap used to alter the cash flow characteristics of an institution's assets so as to Average maturityThe average time to maturity of securities held by a mutual fund. Changes in interest rates Basis pointIn the bond market, the smallest measure used for quoting yields is a basis point. Each percentage Black-Scholes option-pricing modelA model for pricing call options based on arbitrage arguments that uses BONDPARA system that monitors and evaluates the performance of a fixed-income portfolio , as well as the Call money rateAlso called the broker loan rate , the interest rate that banks charge brokers to finance CapAn upper limit on the interest rate on a floating-rate note. CollarAn upper and lower limit on the interest rate on a floating-rate note. Cost of fundsinterest rate associated with borrowing money. CounterpartiesThe parties to an interest rate swap. Crediting rateThe interest rate offered on an investment type insurance policy. Delivery optionsThe options available to the seller of an interest rate futures contract, including the quality Discount rateThe interest rate that the Federal Reserve charges a bank to borrow funds when a bank is Discounted payback period ruleAn investment decision rule in which the cash flows are discounted at an Dollar-weighted rate of returnAlso called the internal rate of return, the interest rate that will make the Drop lockAn arrangement whereby the interest rate on a floating rate note or preferred stock becomes fixed DurationA common gauge of the price sensitivity of an asset or portfolio to a change in interest rates. Effective annual yieldAnnualized interest rate on a security computed using compound interest techniques. Effective dateIn an interest rate swap, the date the swap begins accruing interest. Effective durationThe duration calculated using the approximate duration formula for a bond with an Effective margin (EM)Used with SAT performance measures, the amount equaling the net earned spread, or Equity swapA swap in which the cash flows that are exchanged are based on the total return on some stock Expectations hypothesis theoriesTheories of the term structure of interest rates which include the pure Federal funds rateThis is the interest rate that banks with excess reserves at a Federal Reserve district bank Fisher effectA theory that nominal interest rates in two or more countries should be equal to the required real Fixed-rate payerIn an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a Floating-rate contractA guaranteed investment contract where the credit rating is tied to some variable Floating-rate note (FRN)Note whose interest payment varies with short-term interest rates. Floating-rate payerIn an interest rate swap, the counterparty who pays a rate based on a reference rate, Floating-rate preferredPreferred stock paying dividends that vary with short-term interest rates. Forward rateA projection of future interest rates calculated from either the spot rates or the yield curve. Forward rate agreement (FRA)Agreement to borrow or lend at a specified future date at an interest rate Fundamental analysisSecurity analysis that seeks to detect misvalued securities by an analysis of the firm's Funding riskRelated: interest rate risk GNMA-IIMortgage-backed securities (MBS) on which registered holders receive an aggregate principal and Guaranteed insurance contractA contract promising a stated nominal interest rate over some specific time Hedged portfolioA portfolio consisting of the long position in the stock and the short position in the call Hot moneyMoney that moves across country borders in response to interest rate differences and that moves Inflation uncertaintyThe fact that future inflation rates are not known. It is a possible contributing factor to Intermarket sectorspread The spread between the interest rate offered in two sectors of the bond market for International Fisher effectStates that the interest rate differential between two countries should be an Intramarket sector spreadThe spread between two issues of the same maturity within a market sector. For Inverse floating rate noteA variable rate security whose coupon rate increases as a benchmark interest rate declines. Irrational call optionThe implied call imbedded in the MBS. Identified as irrational because the call is Liability swapAn interest rate swap used to alter the cash flow characteristics of an institution's liabilities so LIBORThe London Interbank Offered rate; the rate of interest that major international banks in London Liquidity preference hypothesisThe argument that greater liquidity is valuable, all else equal. Also, the Liquidity premiumForward rate minus expected future short-term interest rate. Liquidity theory of the term structureA biased expectations theory that asserts that the implied forward Loan valueThe amount a policyholder may borrow against a whole life insurance policy at the interest rate MaturityFor a bond, the date on which the principal is required to be repaid. In an interest rate swap, the Mismatch bondFloating rate note whose interest rate is reset at more frequent intervals than the rollover Monetary policyActions taken by the Board of Governors of the Federal Reserve System to influence the Money market demand accountAn account that pays interest based on short-term interest rates. Mortgage durationA modification of standard duration to account for the impact on duration of MBSs of Mortgage rateThe interest rate on a mortgage loan. Multiperiod immunizationA portfolio strategy in which a portfolio is created that will be capable of Negative durationA situation in which the price of the MBS moves in the same direction as interest rates. NominalIn name only. Differences in compounding cause the nominal rate to differ from the effective
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