|Rate of interest|
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Definition of Rate of interest
Rate of interest
The rate, as a proportion of the principal, at which interest is computed.
The interest rate that clears the market. Also called the market-clearing interest
See interest rate, nominal.
See interest rate, real.
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
Interest rate swap
A binding agreement between counterparties to exchange periodic interest payments on
Nominal interest rate
The interest rate unadjusted for inflation.
Real interest rate
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.
Cost of using money, expressed as a rate per period of time, usually one year.
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.
rate charged or paid for the use of money, normally expressed as a percentage
Arrangements whereby customers who pay before the final date may be entitled to deduct a
In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a
Contractual debt payments based on the coupon rate of interest and the principal amount.
The London Interbank Offered rate; the rate of interest that major international banks in London
Total demand for loans by borrowers equals total supply of loans from lenders. The market,
The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest
A long-term debt instrument in which the issuer (borrower) is
The rate of interest paid on a debt security. Generally stated on an
The rate of interest used to calculate the present value of a stream
present value (PV)
the amount that one or more future cash
Internal rate of return
a. The average annual yield earned by an investment during the period held.
The rate of interest that Canadian financial institutions charge on Canadian dollar loans to certain customers. It is based on the rate established by the Bank of Canada. Typically, all financial institutions have the same prime rate.
the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
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.
Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.
Any depreciation method that produces larger deductions for depreciation in the
The accumulated coupon interest earned but not yet paid to the seller of a bond by the
Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek a
Adjustable rate preferred stock (ARPS)
Publicly traded issues that may be collateralized by mortgages and MBSs.
After-tax real rate of return
Money after-tax rate of return minus the inflation rate.
All equity rate
The discount rate that reflects only the business risks of a project and abstracts from the
Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example, a 5%
Arithmetic average (mean) rate of return
Arithmetic mean return.
Auction rate preferred stock (ARPS)
Floating rate preferred stock, the dividend on which is adjusted every
Average rate of return (ARR)
The ratio of the average cash inflow to the amount invested.
Average tax rate
Taxes as a fraction of income; total taxes divided by total taxable income.
A strategy in which the maturities of the securities included in the portfolio are concentrated
Basic business strategies
Key strategies a firm intends to pursue in carrying out its business plan.
The requirement that a claim holder voting against a plan of reorganization
Break-even payment rate
The prepayment rate of a MBS coupon that will produce the same CFY as that of
Break-even tax rate
The tax rate at which a party to a prospective transaction is indifferent between entering
Broker loan rate
Related: Call money rate.
A strategy in which a portfolio is constructed so that the maturities of its securities are highly
A passive investment strategy with no active buying and selling of stocks from the
Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance
interest that is not immediately expensed, but rather is considered as an asset and is then
Cash flow after interest and taxes
Net income plus depreciation.
A strategy in which a put and with the same strike price and expiration are either both
interest paid on previously earned interest as well as on the principal.
A firm engaged in two or more unrelated businesses.
A merger involving two or more firms that are in unrelated businesses.
The acquisition of one firm by anther firm.
Debt obligations issued by corporations.
A legal document creating a corporation.
One of the three areas of the discipline of finance. It deals with the operation of the firm
Corporate financial management
The application of financial principals within a corporation to create and
Corporate financial planning
Financial planning conducted by a firm that encompasses preparation of both
Corporate processing float
The time that elapses between receipt of payment from a customer and the
Corporate tax view
The argument that double (corporate and individual) taxation of equity returns makes
Corporate taxable equivalent
rate of return required on a par bond to produce the same after-tax yield to
Covered call writing strategy
A strategy that involves writing a call option on securities that the investor
Covered interest arbitrage
A portfolio manager invests dollars in an instrument denominated in a foreign
Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the
The interest rate offered on an investment type insurance policy.
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
The return at which two alternative projects have the same net present value.
Current rate method
Under this currency translation method, all foreign currency balance-sheet and income
Refers to multi-period cash flow matching.
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