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Definition of Interest Rate
Cost of using money, expressed as a rate per period of time, usually one year.
rate charged or paid for the use of money, normally expressed as a percentage
Swap in which the principal or national amount rises (falls) as interest rates
Related: Benchmark interest rate.
Also called the base interest rate, it is the minimum interest rate investors will
An annual measure of the time value of money that fully reflects the effects of
interest rate fixed today on a loan to be made at some future date.
An agreement whereby one party, for an upfront premium, agrees to compensate the
Also called an interest rate ceiling, an interest rate agreement in which payments are made
Related: interest rate cap.
An interest rate agreement in which payments are made when the reference rate falls
The firm's cost of debt capital.
interest rate differential between two countries is equal to the difference
The risk that a security's value changes due to a change in interest rates. For example, a
A binding agreement between counterparties to exchange periodic interest payments on
The interest rate unadjusted for inflation.
The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms
Spot interest rate
interest rate fixed today on a loan that is made today. Related: forward interest rates.
Stated annual interest rate
The interest rate expressed as a per annum percentage, by which interest
Effective Interest Rate
The rate of interest actually earned on an investment. It is
Nominal Interest Rate
The rate of interest quoted, or stated, to be paid on a security
Real Interest Rate
The rate of interest paid on an investment adjusted for inflation
effective annual interest rate
interest rate that is annualized using compound interest.
interest rate parity
Theory that forward premium equals interest rate differential.
nominal interest rate
rate at which money invested grows.
real interest rate
rate at which the purchasing power of an investment increases.
Interest Rate Differential
The interest rate on our financial assets minus the interest rate on a foreign country's financial assets.
Interest Rate, Nominal
Payment for the use of borrowed funds, measured as a percentage per year of these funds.
Interest Rate Parity
Theory that real interest rates are approximately the same across countries except for a risk premium.
Interest Rate, Real
Nominal interest rate less expected inflation.
Term Structure of Interest Rates
Relationship among interest rates on bonds with different terms to maturity.
Fixed Interest Rate
A rate that does not fluctuate with general market conditions.
Floating Interest Rate
A rate that fluctuates with general market condition.
Interest Rate Risk
Possibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing.
Nominal Interest Rate
The contracted, or stated, interest rate, undeflated for price level changes.
tiered interest rate
A pre-set scale of interest which is based on the premise that higher sums of money earn higher rates of interest.
Equilibrium rate of interest
The interest rate that clears the market. Also called the market-clearing interest
Rate of interest
The rate, as a proportion of the principal, at which interest is computed.
Money Rate of Interest
See interest rate, nominal.
Real Rate of Interest
See interest rate, real.
Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate
An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
The average time to maturity of securities held by a mutual fund. Changes in interest rates
In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage
Black-Scholes option-pricing model
A model for pricing call options based on arbitrage arguments that uses
A system that monitors and evaluates the performance of a fixed-income portfolio , as well as the
Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance
An upper limit on the interest rate on a floating-rate note.
An upper and lower limit on the interest rate on a floating-rate note.
Cost of funds
interest rate associated with borrowing money.
The parties to an interest rate swap.
The interest rate offered on an investment type insurance policy.
The options available to the seller of an interest rate futures contract, including the quality
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
Discounted payback period rule
An investment decision rule in which the cash flows are discounted at an
Dollar-weighted rate of return
Also called the internal rate of return, the interest rate that will make the
An arrangement whereby the interest rate on a floating rate note or preferred stock becomes fixed
A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.
Effective annual yield
Annualized interest rate on a security computed using compound interest techniques.
In an interest rate swap, the date the swap begins accruing interest.
The 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
A swap in which the cash flows that are exchanged are based on the total return on some stock
Expectations hypothesis theories
Theories of the term structure of interest rates which include the pure
Federal funds rate
This is the interest rate that banks with excess reserves at a Federal Reserve district bank
A theory that nominal interest rates in two or more countries should be equal to the required real
In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
A 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.
In an interest rate swap, the counterparty who pays a rate based on a reference rate,
Preferred stock paying dividends that vary with short-term interest rates.
A 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
Security analysis that seeks to detect misvalued securities by an analysis of the firm's
Related: interest rate risk
Mortgage-backed securities (MBS) on which registered holders receive an aggregate principal and
Guaranteed insurance contract
A contract promising a stated nominal interest rate over some specific time
A portfolio consisting of the long position in the stock and the short position in the call
Money that moves across country borders in response to interest rate differences and that moves
The fact that future inflation rates are not known. It is a possible contributing factor to
spread The spread between the interest rate offered in two sectors of the bond market for
International Fisher effect
States that the interest rate differential between two countries should be an
Intramarket sector spread
The spread between two issues of the same maturity within a market sector. For
Inverse floating rate note
A variable rate security whose coupon rate increases as a benchmark interest rate declines.
Irrational call option
The implied call imbedded in the MBS. Identified as irrational because the call is
An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so
The London Interbank Offered rate; the rate of interest that major international banks in London
Liquidity preference hypothesis
The argument that greater liquidity is valuable, all else equal. Also, the
Forward rate minus expected future short-term interest rate.
Liquidity theory of the term structure
A biased expectations theory that asserts that the implied forward
The amount a policyholder may borrow against a whole life insurance policy at the interest rate
For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the
Floating rate note whose interest rate is reset at more frequent intervals than the rollover
Actions taken by the Board of Governors of the Federal Reserve System to influence the
Money market demand account
An account that pays interest based on short-term interest rates.
A modification of standard duration to account for the impact on duration of MBSs of
The interest rate on a mortgage loan.
A portfolio strategy in which a portfolio is created that will be capable of
A situation in which the price of the MBS moves in the same direction as interest rates.
In name only. Differences in compounding cause the nominal rate to differ from the effective
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