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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 effective annual interest rateinterest rate that is annualized using compound interest. Effective Interest RateThe rate of interest actually earned on an investment. It is Fixed Interest RateA rate that does not fluctuate with general market conditions. Floating Interest RateA rate that fluctuates with general market condition. 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 DifferentialThe interest rate on our financial assets minus the interest rate on a foreign country's financial assets. Interest rate floorAn interest rate agreement in which payments are made when the reference rate falls Interest Rate, NominalPayment for the use of borrowed funds, measured as a percentage per year of these funds. Interest rate on debtThe firm's cost of debt capital. interest rate parityTheory that forward premium equals interest rate differential. Interest Rate ParityTheory that real interest rates are approximately the same across countries except for a risk premium. Interest rate parity theoreminterest rate differential between two countries is equal to the difference Interest Rate, RealNominal interest rate less expected inflation. Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing. Interest rate swapA binding agreement between counterparties to exchange periodic interest payments on Nominal interest rateThe interest rate unadjusted for inflation. Nominal Interest RateThe rate of interest quoted, or stated, to be paid on a security nominal interest raterate at which money invested grows. Nominal Interest RateThe contracted, or stated, interest rate, undeflated for price level changes. Real interest rateThe rate of interest excluding the effect of inflation; that is, the rate that is earned in terms Real Interest RateThe rate of interest paid on an investment adjusted for inflation real interest raterate at which the purchasing power of an investment increases. 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 Term Structure of Interest RatesRelationship among interest rates on bonds with different terms to maturity. 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 Money Rate of InterestSee interest rate, nominal. Rate of interestThe rate, as a proportion of the principal, at which interest is computed. Real Rate of InterestSee interest rate, real. annual percentage rate (APR)interest rate that is annualized using simple interest. 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 modelThe first complete mathematical model for pricing 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 Book ReturnsBook yield is the investment income earned in a year on a portfolio of assets purchased over a number of years and at different interest rates, divided by the book value of those assets. 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. Collarinterest-rate option that guarantees that the rate on a floating-rate Convertible DebentureAre debt instruments that are convertible into common or preferred shares, take secondary or no security against assets, have flexible terms of repayment and charge fixed or floating interest rates. Cost of fundsinterest rate associated with borrowing money. CounterpartiesThe parties to an interest rate swap. Coupon rateThe nominal interest rate that the issuer promises to pay the Credit RationingRestriction of loans by lenders so that not all borrowers willing to pay the current interest rate are able to obtain loans. 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 discount rateinterest rate used to compute present values of future cash flows. Discount RateThe interest rate at which the Fed is prepared to loan reserves to commercial banks. 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. DurationThe expected life of a fixed-income security considering its coupon 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 Federal Funds RateThe interest rate at which banks lend deposits at the Federal Reserve to one another overnight. Federal Reserve (the Fed)The central bank in the United States, responsible for setting interest rates. financial leverageThe equity (ownership) capital of a business can serve Fisher effectA theory that nominal interest rates in two or more countries should be equal to the required real Fixed Rate LoanLoan for a fixed period of time with a fixed interest rate for the life of the loan. 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. floating-rate securitySecurity paying dividends or interest that vary with short-term interest rates. Floorinterest-rate option that guarantees that the rate on a floating-rate Forward rateA projection of future interest rates calculated from either the spot rates or the yield curve. Forward rateThe future interest rate of a bond inferred from the term 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 future valuethe amount to which one or more sums of Future ValueThe amount to which a payment or series of payments will grow by a given future date when compounded by a given interest rate. FVIF future value interest factor. 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
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