Financial Terms Spot rate

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# Definition of Spot rate

## Spot rate

The current interest rate appropriate for discounting a cash flow of
some given maturity.

## Spot rate

The theoretical yield on a zero-coupon Treasury security.

# Related Terms:

## Spot rate curve

The graphical depiction of the relationship between the spot rates and maturity.

## spot rate of exchange

Exchange rate for an immediate transaction.

## Theoretical spot rate curve

A curve derived from theoretical considerations as applied to the yields of
actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity
greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.

## Spot exchange rates

Exchange rate on currency for immediate delivery. Related: forward exchange rate.

## Spot interest rate

Interest rate fixed today on a loan that is made today. Related: forward interest rates.

## Bootstrapping

A process of creating a theoretical spot rate curve , using one yield projection as the basis for
the yield of the next maturity.

## Forward rate

A projection of future interest rates calculated from either the spot rates or the yield curve.

## 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.

## International Fisher effect

States that the interest rate differential between two countries should be an
unbiased predictor of the future change in the spot rate.

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.

## Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

## Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.

## accelerated depreciation

(1) The estimated useful life of the fixed asset being depreciated is
shorter than a realistic forecast of its probable actual service life;
(2) more of the total cost of the fixed asset is allocated to the first
half of its useful life than to the second half (i.e., there is a

## Accelerated depreciation

Any of several methods that recognize an increased amount
of depreciation in the earliest years of asset usage. This results in increased tax benefits
in the first few years of asset usage.

## Accounting rate of return (ARR)

A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.

## accounting rate of return (ARR)

the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow

## Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

## 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
effects of financing.

## Amortizing interest rate swap

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

## Annual percentage rate (APR)

The periodic rate times the number of periods in a year. For example, a 5%
quarterly return has an APR of 20%.

## annual percentage rate (APR)

Interest rate that is annualized using simple interest.

## 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
seven weeks through a Dutch auction.

## 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.

## average tax rate

Total taxes owed divided by total income.

## Barbell strategy

A strategy in which the maturities of the securities included in the portfolio are concentrated
at two extremes.

## Base interest rate

Related: Benchmark interest rate.

## Basic business strategies

Key strategies a firm intends to pursue in carrying out its business plan.

## 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").

## Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.

## book rate of return

Accounting income divided by book value.
Also called accounting rate of return.

## 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.

## Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.

## Broker loan rate

Related: Call money rate.

## Bullet strategy

A strategy in which a portfolio is constructed so that the maturities of its securities are highly
concentrated at one point on the yield curve.

A passive investment strategy with no active buying and selling of stocks from the
time the portfolio is created until the end of the investment horizon.

## 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.

## Capitalization Rate

A discount rate used to find the present value of a series of future cash receipts. Sometimes called discount rate.

## cash burn rate

A relatively recent term that refers to how fast a business
is using up its available cash, especially when its cash flow from operating
activities is negative instead of positive. This term most often refers
to a business struggling through its start-up or early phases that has not
yet generated enough cash inflow from sales to cover its cash outflow for
expenses (and perhaps never will).

## Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: Straddle

## compensation strategy

a foundation for the compensation plan that addresses the role compensation should play in the organization

## computer integrated manufacturing (CIM)

the integration of two or more flexible manufacturing systems through the use of a host computer and an information networking system

## confrontation strategy

an organizational strategy in which company management decides to confront, rather than avoid, competition; an organizational strategy in which company management still attempts to differentiate company
products through new features or to develop a price
leadership position by dropping prices, even though management
recognizes that competitors will rapidly bring out
similar products and match price changes; an organizational
strategy in which company management identifies
and exploits current opportunities for competitive advantage
in recognition of the fact that those opportunities will
soon be eliminated

## Conglomerate

A firm engaged in two or more unrelated businesses.

## Conglomerate merger

A merger involving two or more firms that are in unrelated businesses.

## Contribution Rate

The percentage tax charged by a state to an employer to
cover its share of the state unemployment insurance fund.

## Corporate acquisition

The acquisition of one firm by anther firm.

## Corporate bonds

Debt obligations issued by corporations.

## Corporate charter

A legal document creating a corporation.

## Corporate finance

One of the three areas of the discipline of finance. It deals with the operation of the firm
(both the investment decision and the financing decision) from that firm's point of view.

## Corporate financial management

The application of financial principals within a corporation to create and
maintain value through decision making and proper resource management.

## Corporate financial planning

Financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.

## Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.

## Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.

## Corporate taxable equivalent

rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.

## cost leadership strategy

a plan to achieve the position in a
competitive environment of being the low cost producer of
a product or provider of a service; it provides one method
of avoiding competition

## Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.

## Coupon Rate

The rate of interest paid on a debt security. Generally stated on an
annual basis, even if the payments are made at some other
interval.

## Coupon rate

The nominal interest rate that the issuer promises to pay the
buyer of a bond.

## coupon rate

Annual interest payment as a percentage of face value.

## Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

## Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

## Crediting rate

The interest rate offered on an investment type insurance policy.

## Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.

## Crossover rate

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
statement items are translated at the current exchange rate.

## Dedication strategy

Refers to multi-period cash flow matching.

## differentiation strategy

a technique for avoiding competition by distinguishing a product or service from that of competitors through adding sufficient value (including quality and/or features) that customers are willing to pay
a higher price than that charged by competitors

## discount 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.

## Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.

## Discount Rate

The rate of interest used to calculate the present value of a stream
of future cash flows

## discount rate

the rate of return used to discount future cash
flows to their present value amounts; it should equal or
exceed an organization’s weighted average cost of capital

## discount rate

Interest rate used to compute present values of future cash flows.

## Discount Rate

The interest rate at which the Fed is prepared to loan reserves to commercial banks.

## Discount Rate

A rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

## Dividend rate

The fixed or floating rate paid on preferred stock based on par value.

## Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.

## Effective annual interest rate

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

## effective annual interest rate

Interest rate that is annualized using compound interest.

## Effective Exchange Rate

The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.

## 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.

## Effective rate

A measure of the time value of money that fully reflects the effects of compounding.

## Effective Tax Rate

The total tax provision divided by pretax book income from continuing
operations.

## Equilibrium rate of interest

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

## Exchange rate

The price of one country's currency expressed in another country's currency.

## exchange rate

Amount of one currency needed to purchase one unit of another.

## Exchange Rate Mechanism (ERM)

The methodology by which members of the EMS maintain their
currency exchange rates within an agreed upon range with respect to other member countries.

## Exchange Rate, Nominal

The price of one currency in terms of another, in this book defined as number of units of foreign currency per dollar.

## Exchange Rate, Real

The nominal exchange rate corrected for price level differences.

## Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.

## expectations theory of exchange rates

Theory that expected spot exchange rate equals the forward rate.

## Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.

## Federal Funds Rate

The interest rate at which banks lend deposits at the Federal Reserve to one another overnight.

## Fisher rate

the rate of return that equates the present values
of the cash flows of all projects being considered; it is the
rate of indifference

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