A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, affecting domestic banks' monetary policy and loans.

Federal Reserve Actions to Support the Flow of Credit o Households and Businesses

Central Banks - summary of current interest rates

Interest Rates, Discount Rate for United States

Table of Contents
What Is a Bank Rate?
How Bank Rates Work
Bank Rate vs. Overnight Rate While the bank rate refers to the rate the central bank charges banks to borrow funds, the overnight rate—also referred to as the federal funds rate—refers to the rate banks charge each other when they borrow funds among themselves. In turn, disposable incomes decrease, it becomes difficult to borrow money to purchase homes and cars, and consumer spending decreases.
The federal funds rate is the interest rate banks charge each other to borrow funds, whereas the discount or bank rate is the rate the Federal Reserve charges commercial banks to borrow funds. In contrast to the bank rate, the overnight rate is the interest rate fellow banks charge each other to borrow money. Contrary to the bank rate, the overnight rate is the interest rate charged by banks loaning funds to each other.

Bank Rate

The biased expectations theory says that the term structure of interest rates is influenced by other factors than expectations of future rates.

The biased expectations theory is a theory of the term structure of interest rates. The liquidity preference theory can be seen in the normal yields of bonds in which longer term bonds, which typically have lesser liquidity and carry a higher interest rate risk than shorter term bonds, have a higher yield to incentivize investors to purchase the bond. It can be contrasted to the pure expectations theory (also called the unbiased expectations theory) that says they are, and the long-term interest rates simply reflect expected short-term rates of equivalent total maturity. Based expectations theory asserts that factors other than current expectations of future short-term interest rates influence current long-term interest rates. If long-term interest rates are determined solely by current expectations of future rates, then an upward sloping yield curve would imply that investors expect short-term rates to rise in the future.

Biased Expectations Theory

A blended rate is an interest rate charged on a loan that's in-between a previous rate and the new rate.

A blended rate is an interest rate charged on a loan that represents the combination of a previous rate and a new rate. A blended rate is an interest rate charged on a loan that represents the combination of a previous rate and a new rate. A blended rate is an interest rate charged on a loan that represents the combination of a previous rate and a new rate. For example, if a company has $50,000 in debt at a 5% interest rate and $50,000 in debt at a 10% interest rate, the total blended rate would be calculated as:
> (50,000 x 0.05 + 50,000 x 0.10) / (50,000 + 50,000) = 7.5% Blended rates are usually offered through the refinancing of existing loans that are charged a rate of interest that is higher than the old loan's rate, but lower than the rate on a brand-new loan.

Blended Rate

A capped rate is an interest rate that is allowed to fluctuate, but which cannot surpass a stated interest cap.

A capped rate is an interest rate that is allowed to fluctuate, but which cannot surpass a stated interest cap. A capped rate loan issues a starting interest rate that is usually a specified spread above a benchmark rate, such as the federal funds rate. Finally, the adjustable-rate can still have an overarching cap that represents an absolute maximum interest rate after any other adjustments, caps on rate resets, or expiration of an initial fixed-rate are taken into account. If the variable rate on a similar loan goes above the capped rate, the capped rate loan holder gets the benefit of not having to pay the extra portion. Then the rate of the loan can be changed to a pure floating rate or reset to a capped rate with a new cap based on market rates at that time.

Capped Rate

The 11th District Cost of Funds Index (COFI) is a monthly weighted average of the interest rates in the states of Arizona, California and Nevada.

The 11th District Cost of Funds Index (COFI) is a monthly weighted average of the interest rates paid on checking and savings accounts offered by financial institutions operating in Arizona, California, and Nevada. With an ARM mortgage, the interest rate on a mortgage moves up and down along with some standard interest rate chosen by the lender, and COFI is one of the most popular indices in the western states. The interest rate on a mortgage will not match the COFI, rather the ARM rate is typically 2% to 3% higher than COFI, depending on the borrower's credit history, the size and terms of the loan, the ability of the borrower to negotiate with the bank and many other factors. Published on the last day of each month, the COFI represents the cost of funds for western savings institutions that are members of Federal Home Loan Bank of San Francisco, a self-regulatory agency, and satisfy the Bank's criteria for inclusion in the index. The 11th District Cost of Funds Index (COFI) is a monthly weighted average of the interest rates paid on checking and savings accounts offered by financial institutions operating in Arizona, California, and Nevada.

11th District Cost of Funds Index (COFI)

The Cox-Ingersoll-Ross model is a mathematical formula used to model interest rate movements and is driven by a sole source of market risk.

The Cox-Ingersoll-Ross model (CIR) is a mathematical formula used to model interest rate movements. The equation for the CIR model is expressed as follows:
d r t \= a ( b − r t ) d t \+ σ r t d W t where: r t \= Instantaneous interest rate at time  t a \= Rate of mean reversion b \= Mean of the interest rate W t \= Wiener process (random variable modeling the market risk factor) σ \= Standard deviation of the interest rate (measure of volatility) \\begin{aligned}&dr\_{t}=a(b-r\_{t})\\,dt+\\sigma {\\sqrt {r\_{t}}}\\,dW\_{t} \\\\&\\textbf{where:} \\\\&rt = \\text{Instantaneous interest rate at time } t \\\\&a = \\text{Rate of mean reversion} \\\\&b = \\text{Mean of the interest rate} \\\\&W\_t = \\text{Wiener process (random variable} \\\\&\\text{modeling the market risk factor)} \\\\&\\sigma = \\text{Standard deviation of the interest rate} \\\\&\\text{(measure of volatility)} \\\\\\end{aligned} ​drt​\=a(b−rt​)dt+σrt​​dWt​where:rt\=Instantaneous interest rate at time ta\=Rate of mean reversionb\=Mean of the interest rateWt​\=Wiener process (random variablemodeling the market risk factor)σ\=Standard deviation of the interest rate(measure of volatility)​ The CIR model was developed in 1985 by John C. Cox, Jonathan E. Ingersoll, and Stephen A. Ross as an offshoot of the Vasicek Interest Rate model and can be utilized, among other things, to calculate prices for bonds and value interest rate derivatives. The Cox-Ingersoll-Ross model (CIR) is a mathematical formula used to model interest rate movements. The CIR model determines interest rate movements as a product of current volatility, the mean rate, and spreads.

Cox-Ingersoll-Ross Model (CIR)

A dove is an economic policy advisor who favors strategies that maintain low interest rates and other expansionary policies.

A dove is an economic policy advisor who promotes monetary policies that usually involve low-interest rates. Doves tend to support low-interest rates and an expansionary monetary policy because they value indicators like low unemployment over keeping inflation low. If an economist suggests that inflation has few negative effects or calls for quantitative easing, then they are called a dove or labeled as dovish.
Doves are perceived as being more interested in spurring job growth through low-interest rates than they are in controlling inflation. In the United States, doves tend to be the members of the Federal Reserve who are responsible for setting interest rates, but the term also applies to journalists or politicians who lobby for low rates as well. Doves prefer low-interest rates as a means of encouraging economic growth because they tend to increase demand for consumer borrowing and spur consumer spending.

Dove

A drop lock is an arrangement whereby the interest rate on a floating rate note or preferred stock becomes fixed if it falls to a specified level.

A drop lock is an arrangement whereby the interest rate on a floating-rate note or preferred stock becomes fixed if it falls to a specified level. Once the benchmark is established, this floating interest rate continues until the base rate falls below a specified trigger rate, on an interest fixing date or on two consecutive interest fixing dates, at which time the interest rate becomes fixed at the specified minimum rate for the remaining lifetime of the bond. A drop lock is a bond that has a floating rate with a minimum level, at which the rate locks and the bond converts to a fixed rate. However, there are potential downsides for investors who sell their bond holdings prior to maturity, because the market value of fixed-rate securities fluctuates with changing interest rates, and in a dropping-rate climate, market values will change to a degree that’s determined by the time left remaining until maturity or call date, potentially triggering capital gains. Drop lock bonds are issued to investors with a floating-rate interest which can reset on a semiannual basis, at a specified margin that hovers above a declared base rate linked to a particular benchmark.

Drop Lock

The Emirates Interbank Offered Rate (EIBOR) is the benchmark interest rate used as a reference to set other rates in the UAE.

Regulations Regarding Emirates Interbank Offered Rate (EIBOR) Submissions (Amended May 3, 2020)

The Emirates Interbank Offered Rate, known by its abbreviation EIBOR, is the benchmark interest rate, stated in UAE dirham, for lending between banks within the United Arab Emirates (UAE) market. The EIBOR, similar in purpose to the London Interbank Offered Rate (LIBOR), is a benchmark interest rate published daily by the Central Bank of the UAE that reflects an average of rates offered by major UAE banks for loans of short-term funding to other banks. The Emirates Interbank Offered Rate (EIBOR) is a synthetic benchmark interest rate derived from the interest rates that major banks in the UAE offer to other banks for short-term loans. The Emirates Interbank Offered Rate, known by its abbreviation EIBOR, is the benchmark interest rate, stated in UAE dirham, for lending between banks within the United Arab Emirates (UAE) market. EIBOR is calculated daily by the Central Bank of the UAE and published for use as a general reference for market interest rates and is widely used to set other interest rates in the region.

Emirates Interbank Offered Rate (EIBOR)

EURIBOR is a reference rate expressing the average interest rate at which eurozone banks offer unsecured loans on the interbank market.

Euribor, or the Euro Interbank Offer Rate, is a reference rate that is constructed from the average interest rate at which eurozone banks offer unsecured short-term lending on the inter-bank market. As of 2018, these panel banks include:
Belfius (Belgium)
BNP Paribas (France)
HSBC France
Natixis (France)
Crédit Agricole (France)
Société Générale (France)
Deutsche Bank (Germany)
DZ Bank (Germany)
National Bank of Greece
Intesa Sanpaolo (Italy)
Monte dei Paschi di Siena (Italy)
UniCredit (Italy)
Banque et Caisse d'Épargne de l'État (Luxembourg)
ING Bank (Netherlands)
Caixa Geral De Depósitos (Portugal)
Banco Bilbao Vizcaya Argentaria (Spain)
Banco Santander (Spain)
CECABANK (Spain)
CaixaBank (Spain)
Barclays (Britain)
Eonia, or the Euro Overnight Index Average, is also a daily reference rate that expresses the weighted average of unsecured overnight interbank lending in the European Union and the European Free Trade Association (EFTA). Euribor is calculated by a benchmark administrator called Global Rate Set Systems Ltd. and offered by the European Money Markets Institute (EMMI).
The Euro Interbank Offer Rate (Euribor) in fact refers to a set of eight money market rates corresponding to different maturities: the one-week, two-week, one-month, two-month, three-month, six-month, nine-month, and twelve-month rates. Euribor, or the Euro Interbank Offer Rate, is a reference rate that is constructed from the average interest rate at which eurozone banks offer unsecured short-term lending on the inter-bank market. Euribor is an overnight interbank rate comprised of the average interest rates from a panel of large European banks that are used for lending to one another in euros.

Euro Interbank Offer Rate (Euribor)

Euro LIBOR is the London Interbank Offered Rate denominated in euros, which banks offer each other for large, short-term loans.

Euro LIBOR is the London Interbank Offered Rate (LIBOR) denominated in euros. LIBOR represents the average interest rate that leading banks in London estimate they would charge for lending to other banks, the Euro Interbank Offered Rate, known as EURIBOR, is a similar reference rate derived from banks across the Eurozone. In this case, the Euro LIBOR rate used is the one-year Euro LIBOR plus a 35 basis point spread. Euro LIBOR's primary function is to serve as the benchmark reference rate for debt instruments, including government and corporate bonds, mortgages, student loans, credit cards; as well as derivatives, such as currency and interest swaps, among many other financial products. Euro LIBOR is the London Interbank Offered Rate (LIBOR) denominated in euros.

Euro LIBOR

Expectations theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates. The theory suggests that an investor earns the same interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today.

Expectations theory predicts future short-term interest rates based on current long-term interest rates
The theory suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today The next step is to square the result or (1.2 \* 1.2 = 1.44).
Divide the result by the current one-year interest rate and add one or ((1.44 / 1.18) +1 = 1.22).
To calculate the forecast one-year bond interest rate for the following year, subtract one from the result or (1.22 -1 = 0.22 or 22%).
In this example, the investor is earning an equivalent return to the present interest rate of a two-year bond. Expectations theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates. Expectations theory aims to help investors make decisions by using long-term rates, typically from government bonds, to forecast the rate for short-term bonds.

Expectations Theory

The federal discount rate is the reference interest rate set by the Federal Reserve for lending to banks and other institutions. 

The federal discount rate is the interest rate set by the Federal Reserve (Fed) on loans extended by the central bank to commercial banks or other depository institutions. As long as the Fed funds rate is lower than the discount rate, commercial banks will prefer to borrow from another commercial bank rather than the Fed. The federal discount rate is the interest rate set by the Federal Reserve (Fed) on loans extended by the central bank to commercial banks or other depository institutions. The federal discount rate is the interest rate the Federal Reserve (Fed) charges banks to borrow funds from a Federal Reserve bank. The discount rate is typically set higher than the federal funds rate target, usually by 100 basis points (1 percentage point), because the central bank prefers that banks borrow from each other so that they continually monitor each other for credit risk and liquidity.

Federal Discount Rate

The Fisher Effect is an economic theory created by Irving Fisher that describes the relationship between inflation and both real and nominal interest rates.

The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Fisher's equation reflects that the real interest rate can be taken by subtracting the expected inflation rate from the nominal interest rate. In the Fisher Effect, the nominal interest rate is the provided actual interest rate that reflects the monetary growth padded over time to a particular amount of money or currency owed to a financial lender.

Fisher Effect

Gibson's Paradox is an economic observation that points to the positive correlation between interest rates and wholesale prices.

Gibson's paradox is based on an economic observation made by British economist Alfred Herbert Gibson regarding the positive correlation between interest rates and wholesale price levels. According to his theory of how price levels are determined, Keynes says this implies that when interest rates are falling the price level will fall and when interest rates are rising the price level will rise. Under Gibson's paradox, the correlation between interest rates and prices was a market-driven phenomenon, which can't exist when interest rates are artificially linked to inflation through central bank intervention. In the end, Gibson’s paradox was neither Gibson’s (having been previously discovered by others) nor a true paradox (as plausible explanations already existed at the time of Keynes's writing and more have been explored since) and is of little interest beyond being a historical footnote to the gold standard era. Gibson's paradox is based on an economic observation made by British economist Alfred Herbert Gibson regarding the positive correlation between interest rates and wholesale price levels.

Gibson's Paradox

A guaranteed investment certificate is a deposit investment security that Canadian banks and trust companies sell.

In Canada, a guaranteed investment certificate (GIC) is a deposit investment sold by Canadian banks and trust companies. Other forms of safe and income-producing securities are U.S. Treasury securities, including T-bills, T-notes, and T-bonds. GICs, along with T-bills, Treasury bonds, and other income-producing securities are often good options in these cases because they are safe, generally liquid, and produce streams of cash, particularly for older investors, retired, and might not have a steady salary anymore. Even if the bank fails, investors are insured for up to 100,000 Canadian dollars by the Canadian Deposit Insurance Corporation (GDIC).
A bank's profit is the difference between lending rates and the rates they pay on GICs. GICs offer a return that is slightly higher than Treasury bills (or T-bills), making them an excellent option to diversify a stream of liquid, safe securities in a portfolio.

Canadian Guaranteed Investment Certificate (GIC)

An inflation hawk, in fiscal policy, is a policymaker or advisor who prioritizes controlling inflation and may favor higher interest rates to keep it in check.

Introducing the new Federal Reserve Chair Jerome Powell

An inflation hawk, also known in monetary jargon as a hawk, is a policymaker or advisor who is predominantly concerned with the potential impact of interest rates as they relate to fiscal policy. A budget hawk, for example, believes the federal budget is of the utmost importance—just like a generic hawk (or inflation hawk) is focused on interest rates. An inflation hawk, also known in monetary jargon as a hawk, is a policymaker or advisor who is predominantly concerned with the potential impact of interest rates as they relate to fiscal policy. If the relative inflation rate in the U.S. is falling relative to the inflation rate in a trading partner, the exchange rate should adjust to keep prices in line with the dollar appreciating relative to the trading partners. The opposite of a hawk is a dove, or an economic policy advisor who prefers monetary policies that involve low-interest rates.

Inflation Hawk

The Hong Kong Interbank Offered Rate (HIBOR) is a Hong Kong dollar-based interest rate benchmark for lending between banks in the Hong Kong market.

The Hong Kong Interbank Offered Rate, known by its abbreviation HIBOR, is the benchmark interest rate, stated in Hong Kong dollars, for lending between banks within the Hong Kong market. The Hong Kong Interbank Offered Rate, known by its abbreviation HIBOR, is the benchmark interest rate, stated in Hong Kong dollars, for lending between banks within the Hong Kong market. If a Hong Kong bank is nearing the point at which withdrawals are close to depleting short-term cash reserves, that bank will go into the Hong Kong interbank market and borrow money at the Hong Kong Interbank Offered Rate (HIBOR). For example, an interest rate swap involving two counterparties with good credit ratings, both of which have bonds issued in Hong Kong dollars, will likely be quoted in HIBOR plus a given percentage. In another example, a Hong Kong dollar-denominated floating-rate note (FRN), or floater, which pays coupons based on HIBOR plus a margin of 35 basis points (0.35%) annually.

Hong Kong Interbank Offered Rate (HIBOR)

The interbank rate is the interest charged on short-term loans between banks. Banks constantly swap money to ensure liquidity or put spare cash to use.

The interbank rate is the rate of interest charged on short-term loans made between U.S. banks. However, all interest rates for borrowing or saving money are based on that key federal fund's rate, so a rate for a mortgage or a credit card will be based on the federal funds rate plus a premium. This rate, also known as the interbank rate or the overnight rate, is actually set by the banks themselves, The term interbank rate also refers to the interest rate charged when banks conduct wholesale transactions in foreign currencies with banks in other nations. As with the interbank interest rate, consumers are not going to get the interbank foreign exchange rate when they exchange money.

Interbank Rate

An interest-rate derivative is a broad term for a derivative contract, such as a futures, option, or swap, that has an interest rate as its underlying asset.

An interest rate derivative is a financial instrument with a value that is linked to the movements of an interest rate or rates. Less common interest rate derivatives include eurostrips, which are a strip of futures on the eurocurrency deposit market; swaptions, which give the holder the right but not the obligation to enter into a swap if a given rate level is reached; and interest rate call options, which give the holder the right to receive a stream of payments based on a floating rate and then make payments based on a fixed rate. There are two parties to a swap: party one receives a stream of interest payments based on a floating interest rate and pays a stream of interest payments based on a fixed rate. Interest rate derivatives are most often used to hedge against interest rate risk, or else to speculate on the direction of future interest rate moves. A forward rate agreement (FRA) is an over-the-counter contract that fixes the rate of interest to be paid on an agreed upon date in the future to exchange an interest rate commitment on a notional amount.

Interest-Rate Derivative

An interest rate index is an index based on the interest rate of a financial instrument or basket of financial instruments.

An interest rate index is an index based on the interest rate of a financial instrument or basket of financial instruments. The Treasury Constant Maturities Index serves as a standard for adjustable-rate mortgages (ARM).
Investors, borrowers, and lenders often use an interest rate index to determine the interest rates of the financial products they buy and sell. An interest rate index is an index based on the interest rate of a financial instrument or basket of financial instruments. The London Interbank Offered Rate (LIBOR) interest rate index, calculated from estimates submitted by London's leading banks, is the most popular and widely-used standard for short-term rates. An interest rate index serves as a benchmark to calculate the interest rate that lenders may charge on financial products, such as mortgages.

Interest Rate Index

Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in interest rates.

Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. There are four widely used duration measurements to determine a fixed-income security's interest-rate sensitivity—the Macaulay duration, modified duration, effective duration, and key rate duration. The key rate duration determines a fixed-income security's or fixed-income portfolio's duration at a specific maturity on the yield curve. The higher a bond or bond fund's duration, the more sensitive the bond or bond fund to changes in interest rates. Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment.

Interest Rate Sensitivity

Interest rate parity (IRP) is the fundamental equation that governs the relationship between interest rates and foreign exchange rates.

Table of Contents
Interest Rate Parity (IRP)
Understanding IRP
Forward Exchange Rate
Covered vs. Uncovered IRP
Covered IRP Example
 The formula for IRP is:
F 0 \= S 0 × ( 1 \+ i c 1 \+ i b ) where: F 0 \= Forward Rate S 0 \= Spot Rate i c \= Interest rate in country  c i b \= Interest rate in country  b \\begin{aligned} &F\_0 = S\_0 \\times \\left ( \\frac{ 1 + i\_c }{ 1 + i\_b } \\right ) \\\\ &\\textbf{where:}\\\\ &F\_0 = \\text{Forward Rate} \\\\ &S\_0 = \\text{Spot Rate} \\\\ &i\_c = \\text{Interest rate in country }c \\\\ &i\_b = \\text{Interest rate in country }b \\\\ \\end{aligned} ​F0​\=S0​×(1+ib​1+ic​​)where:F0​\=Forward RateS0​\=Spot Rateic​\=Interest rate in country cib​\=Interest rate in country b​
An understanding of forward rates is fundamental to IRP, especially as it pertains to arbitrage. 1:36
Interest rate parity (IRP) plays an essential role in foreign exchange markets by connecting interest rates, spot exchange rates, and foreign exchange rates. Interest rate parity (IRP) is a theory according to which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Forward exchange rates for currencies are exchange rates at a future point in time, as opposed to spot exchange rates, which are current rates.

Interest Rate Parity (IRP)

Intermediate targets are set by the Federal Reserve as part of its monetary policy to indirectly control economic performance.

Intermediate Targets and Indicators for Monetary Policy

Intermediate targets are economic and financial variables that central bankers try to influence by using monetary policy tools, but which are not in themselves the ultimate goal or target of a policy. In general, intermediate targets change quickly to match new policy decisions and behave in a predictable manner relative to a central bank's stated economic goals, such as full employment or stable prices. Instead, it employs four key tools of monetary policy (i.e., open market operations (OMO), discount lending, bank reserve requirements, and forward guidance) to influence intermediate targets that policymakers believe to be related to their mandated goals. These intermediate targets that the central bank can influence are, in turn, related to the ultimate goals of the policy either because they are linked in a chain of cause and effect described by economic theory or because they can be observed to be highly correlated with them (or both). Intermediate targets are economic and financial variables that central bankers try to influence by using monetary policy tools, but which are not in themselves the ultimate goal or target of a policy.

Intermediate Targets

The key rate is a benchmark interest rate that determines bank lending rates and the cost of credit for borrowers.

The key rate is the specific interest rate that determines bank lending rates and the cost of credit for borrowers. The Federal Reserve is able to control the money supply by adjusting the key rate since the prime rate depends on the key rate. If the fed funds rate increases after the discount rate increases, banks will alter their prime rates to reflect this change. The rate that banks can borrow from other banks at is called the federal funds rate. The rate banks borrow from the Federal Reserve at is called the discount rate.

Key Rate

A legal rate of interest is a limit set to prevent lenders from charging borrowers excessive interest rates.

The legal rate of interest is the highest rate of interest that can be legally charged on any type of debt, and to which a lender must adhere. The legal rate of interest applies to all types of debt, although certain types of debt may carry a higher legal rate than another—for instance, the legal limit for a payday lender may be higher than the legal limit for a student loan. Agreeing to receive financing at the interest rate assigned by the lender could override the protections that a legal rate of interest offer whether or not the customer later attests to fully understanding her rights. The legal rate of interest is the highest rate of interest that can be legally charged on any type of debt, and to which a lender must adhere. An interest rate that exceeds the legal rate of interest is classified as usuary, for which there are stiff penalties in most states.

Legal Rate of Interest

The London Interbank Bid Rate is the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the interbank market.

The London Interbank Bid Rate (LIBID) is the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the interbank market. The London Interbank Bid Rate (LIBID) is the average interest rate at which major London banks bid for eurocurrency deposits from other banks in the interbank market. It is the bid rate that banks are willing to pay for eurocurrency deposits and other banks' unsecured funds in the London interbank market, while the more popular LIBOR is the offered rate. Both of these rates (especially LIBOR) are considered the foremost global reference rates for short-term interest rates of a variety of global financial instruments such as short-term interest futures contracts, forward rate agreements, interest rate swaps, and currency options. LIMEAN is also used by institutions borrowing and lending money in the interbank market (rather than using LIBOR or LIBID) and is a reliable reference to the mid-market rate of the interbank market.

London Interbank Bid Rate (LIBID) Defintition

LIBOR flat is an interest rate benchmark that is based on LIBOR.

LIBOR flat is an interest rate benchmark that is based on the London Interbank Offered Rate (LIBOR). Some transactions, such as interest rate swaps, may use LIBOR flat as a basic contract rate or a rate to be paid under certain contingencies. In this scenario, the floating rate counterparty would benefit when LIBOR decreased while the fixed rate counterparty would benefit when LIBOR increased. In a simple interest rate swap example, LIBOR flat can serve as the base interest rate. LIBOR flat is an interest rate benchmark that is based on the London Interbank Offered Rate (LIBOR).

LIBOR Flat

The London Interbank Mean Rate (LIMEAN) is the midmarket rate in London, which is the average of the offer rate (LIBOR) and the bid rate (LIBID).

LIBOR: Origins, Economics, Crisis, Scandal, and Reform

The London Interbank Mean Rate (LIMEAN) is the midmarket rate in the London interbank market, which is calculated by averaging the offer rate (LIBOR) and the bid rate (LIBID). The London Interbank Mean Rate (LIMEAN) is the midmarket rate in the London interbank market, which is calculated by averaging the offer rate (LIBOR) and the bid rate (LIBID). LIMEAN is calculated as the average of LIBOR and LIBID, the offer and bid rates on short-term funds in the London interbank market. The LIMEAN rate can be used by institutions borrowing and lending money in the interbank market, instead of relying on the LIBID or LIBOR rates in any lending agreements. The LIBOR is the rate at which funds are sold in the market, while the LIBID is the rate at which the funds are purchased in the market.

London Interbank Mean Rate (LIMEAN)

A low interest rate environment is defined as a condition when the risk-free rate of interest is lower than the historic average.

Back to Basics: How Can Interest Rates Be Negative

A low interest rate environment occurs when the risk-free rate of interest, typically set by a central bank, is lower than the historic average for a prolonged period of time. Just as there are advantages to a low interest rate environment, there are also drawbacks, especially if the rates are kept extremely low for a long period of time. Lower borrowing rates mean investments are also affected, so anyone putting money into a savings account or a similar vehicle won't see much of a return during this type of environment. Zero interest rates and negative interest rates are two extreme examples of low interest rate environments. A low interest rate environment occurs when the risk-free rate of interest, typically set by a central bank, is lower than the historic average for a prolonged period of time. Much of the developed world has experienced a low interest rate environment since 2009 as monetary authorities from around the globe cut interest rates to effectively 0% in order to stimulate economic growth and prevent deflation.

Low Interest Rate Environment

Market segmentation theory is a theory that there is no relationship between long and short-term interest rates.

Market segmentation theory is a theory that long and short-term interest rates are not related to each other. Market segmentation theory further asserts that the buyers and sellers who make up the market for short-term securities have different characteristics and motivations than buyers and sellers of intermediate and long-term maturity securities. However, advocates of the market segmentation theory suggest that examining a traditional yield curve covering all maturity lengths is a fruitless endeavor because short-term rates are not predictive of long-term rates. Related to the market segmentation theory is the preferred habitat theory, which states that investors prefer to remain in their own bond maturity range due to guaranteed yields. Market segmentation theory is a theory that long and short-term interest rates are not related to each other.

Market Segmentation Theory

Maturity gap is a measurement of interest rate risk for risk-sensitive assets and liabilities.

A maturity gap is the difference between the total market values of interest rate sensitive assets versus interest rate sensitive liabilities that will mature or be repriced over a given range of future dates. Let’s calculate the maturity gap and net interest income (or expense) for next year if interest rates increase by 2% (or 200 basis points).
**_(in millions)_**
Floating rate loans (8% annually)
20-year fixed rate loans (6% annually)
_Total Assets_
**Liabilities & Equity**
Current Deposits (5% annually)
Fixed Term Deposits (5% annually)
_Total Liabilities_
Using the figures in the table, the company’s maturity gap for the next 365 days is:
Interest Rate Sensitive Assets – Interest Rate Sensitive Liabilities
\= $10 – $12
\= –$2 million
Because the bank has more interest rate sensitive liabilities than assets in this band, the maturity gap is negative. Expected net interest income (in millions) at the end of the year is:
Interest income from Assets – Interest expense from Liabilities
\= ($10 x 8%) + ($15 x 6%) – \[($12 x 5%) + ($8 x 5%)\]
\= $0.80 + $0.90 – ($0.60 + $0.40)
\= $1.7 - $1
Expected Net Interest Income = $0.70, or $700,000
If interest rates increase, let’s see how the change will affect the company’s expected net interest income using maturity gap analysis. It provides a measure of the interest rate based repricing risk that a bank faces for a given set of assets and liabilities of similar maturity dates and the potential impact of changing interest rates on net interest income. Assets – Floating rate loans: $10 x (8% + 2%) = $1
Fixed rate loans: $15 x 6% = $0.90 (no change in rates)
Liabilities – Current deposits: $12 x (5% + 2%) = $0.84
Fixed term deposits: $8 x 5% = $0.40 (no change in rates)
Calculate the net interest income by adding the resultant values together.

Maturity Gap

The Mumbai Interbank Forward Offer Rate (MIFOR) is a rate that Indian banks use to set prices on forward-rate agreements and derivatives.

The Mumbai Interbank Forward Offer Rate (MIFOR) is the rate that Indian banks use as a benchmark for setting prices on forward-rate agreements and derivatives. MIFOR also includes the swap points of a currency swap between the U.S. dollar and Indian rupee (USD/INR) of the same maturity. The reason for this is that an Indian bank pays LIBOR to borrow dollars in the interbank market and then gets rupees via the currency swap. The Reserve Bank of India (RBI) publishes MIFOR on its website so that investors don't have to calculate the swap points, which is the interest rate differential between the U.S. and India for a particular settlement date such as one month, two months, and so on. However, it's difficult to calculate MIFOR because it uses currency swap points in addition to the LIBOR interest rate plus an unknown credit spread added by the Reserve Bank of India. MIFOR is a benchmark for setting rates for derivatives in India, but to better understand its function, we must understand how interbank interest rates relate to MIFOR.

Mumbai Interbank Forward Offer Rate (MIFOR)

A negative interest rate environment exists when a central bank or monetary authority sets the nominal overnight interest rate to below zero percent.

A negative interest rate environment exists when the nominal overnight interest rate falls below zero percent for a particular economic zone. Instituting a negative interest rate environment can even inspire a cash run, triggering households to pull their cash out of the bank in order to avoid paying negative interest rates for saving. Central banks have hesitated to lower negative interest rates too far below zero because the practice of creating negative interest rate environments did not begin until recently, with the ECB being the first major financial institution to create such an environment. A negative interest rate policy (NIRP) is an unconventional monetary policy tool whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. In a negative interest rate environment, financial institutions must pay interest to deposit funds and can actually receive interest on borrowed money.

Negative Interest Rate Environment

Negative interest rates occur when borrowers are credited interest, rather than paying interest to lenders.

Current Interest Rates and Exchange Rates

New Framework for Strengthening Monetary Easing: "Quantitative and Qualitative Monetary Easing with Yield Curve Control

Table of Contents
What Is a Negative Interest Rate?
Understanding Negative Rates
Special Considerations
Consequences of Negative Rates With negative interest rates, commercial banks are charged interest to keep cash with a nation's central bank, rather than receiving interest. While real interest rates can be effectively negative if inflation exceeds the nominal interest rate, the nominal interest rate is, theoretically, bounded by zero. Some central banks have set a negative interest rate policy (NIRP) in order to stimulate economic growth in the financial sector, or else to protect the value of a local currency against exchange-rate increases due to large inflows of foreign investment. Borrowers are credited interest instead of paying interest to lenders in a negative interest rate environment.

Negative Interest Rate

Nominal interest rate is the interest rate before taking inflation into account, in contrast to real interest rates and effective interest rates. 

How does monetary policy affect the U.S. economy?

Nominal interest rate refers to the interest rate before taking inflation into account. The equation that links nominal and real interest rates can be approximated as nominal rate = real interest rate + inflation rate, or nominal rate - inflation rate = real interest rate. To avoid purchasing power erosion through inflation, investors consider the real interest rate, rather than the nominal interest rate.
APY (annual percentage yield) is the effective interest rate which tends to be more relevant to borrowers and lenders than the nominal, or stated, interest rate. The federal funds rate, the interest rate set by the Federal Reserve, is the short-term nominal interest rate that is the basis for other interest rates charged by banks and financial institutions. The nominal interest rate (n) for a specified period, when the effective interest rate is known, can be calculated as:
n = m × \[ ( 1 + e)1/m - 1 \]
e = effective rate
m = number of compounding periods

Nominal Interest Rate

The overnight rate is the interest rate at which a depository institution can lend or borrow funds that are required to meet overnight balances.

The overnight rate is the interest rate at which a depository institution (generally banks) lends or borrows funds with another depository institution in the overnight market. The overnight rate indirectly affects mortgage rates in that as the overnight rate increases, it is more expensive for banks to settle their accounts, so to compensate they will raise longer-term rates. The overnight rate is the interest rate at which a depository institution (generally banks) lends or borrows funds with another depository institution in the overnight market. In the United States, the overnight rate is referred to as the federal funds rate, while in Canada, it is known as the policy interest rate. In many countries, the overnight rate is the interest rate the central bank sets to target monetary policy.

Overnight Rate

The pime rate is the interest rate that commercial banks charge their most creditworthy customers.

The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate that banks use to lend to one another. Although other U.S. financial services institutions regularly note any changes that the Federal Reserve (the Fed) makes to its prime rate, and may use them to justify changes to their own prime rates, institutions are not required to raise their prime rates in accordance with the Fed's. The federal funds overnight rate serves as the basis for the prime rate, and prime serves as the starting point for most other interest rates. 1:06
The prime rate (prime) is the interest rate that commercial banks charge their most creditworthy customers, generally large corporations.

Prime Rate

A real interest rate is one that has been adjusted for inflation, reflecting the real cost of funds to the borrower and the real yield to the lender.

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. As the true rate of inflation may not be known until the time period corresponding with the holding time of the investment has passed, the associated real interest rates must be considered predictive, or anticipatory, in nature, when the rates apply to time periods that have yet to pass.
In cases where inflation is positive, the real interest rate is lower than the advertised nominal interest rate. If those funds were instead placed in a savings account with an interest rate of 1%, and the rate of inflation remained at 3%, the real value, or purchasing power, of the funds in savings will have actually decreased, as the real interest rate would be -2%, after accounting for inflation. 1:47
While the nominal interest rate is the interest rate actually paid on a loan or investment, the real interest rate is a reflection of the change in purchasing power derived from an investment or given up by the borrower. The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate:
Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual)

Real Interest Rate

A reference rate uses benchmarks, like the prime rate and the LIBOR, to set other interest rates.

A reference rate is an interest rate benchmark used to set other interest rates. Reference rates are used in an adjustable-rate mortgage (ARM), in which the borrower's interest rate is the reference rate—usually, the prime rate—added to an additional set amount, called the spread. Difficulties happen especially if the rate is in the form of an inflation benchmark, such as the Consumer Price Index (CPI or as a measure of economic health, such as the unemployment rate or corporate default rate.
Reference rates are at the core of an adjustable-rate mortgage (ARM). A common reference rate might be LIBOR, which would be used as a reference in interest rate swaps or an interest rate agreement. In an interest rate swap, the floating reference rate is exchanged by one party for a fixed interest rate or a set of payments.

Reference Rate

Reykjavik Interbank Offered Rate (REIBOR) is the interbank market rate for short-term loans at Icelandic commercial and savings banks.

Central Bank to discontinue 9- and 12-month REIBOR listings in mid-2020

The Financial Crisis on Iceland - A Macro Perspective

Iceland Reykjavik Interbank Offered Rate: Overnight

IMF Survey: Iceland Gets Help to Recover From Historic Crisis

The Reykjavik Interbank Offered Rate (REIBOR) is the formal interbank market reference rate used to set rates for short-term loans at Icelandic commercial and savings banks. REIBOR is a benchmark reference rate based on short-term interest rates offered between Icelandic banks, and it is used to set other interest rates in Iceland. The Reykjavik Interbank Offered Rate (REIBOR) is the formal interbank market reference rate used to set rates for short-term loans at Icelandic commercial and savings banks. In December 2019, the Central Bank of Iceland said it would stop listing 9- and 12-month REIBOR rates, as no interbank loans had been made on those terms since 2008. Icelandic banks submit quotes for rates on short-term deposits and loans to the Central Bank.

Reykjavik Interbank Offered Rate (REIBOR)

The Singapore Interbank Offered Rate (SIBOR) is the benchmark interest rate for lending between banks in markets within the Asian time zones. 

The Singapore Interbank Offered Rate (SIBOR) is the benchmark interest rate, stated in Singapore dollars, for lending between banks within the Asian market. If a regional bank is near the point at which withdrawals are close to depleting short-term cash reserves, that bank will go into the Singapore interbank market and borrow money at the Singapore Interbank Offered Rate (SIBOR). The terms of the loans vary from overnight to one year.
Because of its location, political stability, strict legal and regulatory environment, as well as the volume of business undertaken in Singapore, the city-state is regarded as a major hub of Asian finance. The Singapore Interbank Offered Rate (SIBOR) is the benchmark interest rate, stated in Singapore dollars, for lending between banks within the Asian market. The Singapore Interbank Offered Rate (SIBOR) is the benchmark interest rate, stated in Singapore dollars, for lending between banks within the Asian market. For example, an interest rate swap involving two counterparties with good credit ratings, both of which have bonds issued in Singapore dollars, will likely be quoted in SIBOR plus a given percentage.

Singapore Interbank Offered Rate (SIBOR)

SONIA (Sterling Overnight Index Average) is the effective overnight interest rate for unsecured transactions in the British sterling market.

The Sterling Overnight Index Average, abbreviated SONIA, is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market. In April 2017, the Working Group on Sterling Risk-Free Reference Rates, which is a group of active, influential dealers in the sterling interest rate swap market, announced SONIA would be it's preferred, near risk-free interest rate benchmark. The Sterling Overnight Interbank Average Rate provides traders and financial institutions with an alternative to the London Interbank Offered Rate, or LIBOR, as a benchmark interest rate for short-term financial transactions. This change will impact sterling derivatives and related financial contracts, and provide an alternative interest rate to the dominant London Interbank Offered Rate (LIBOR).
To that end, the U.K.'s Financial Conduct Authority announced it would no longer require banks to submit LIBOR quotes after the year 2021. The Sterling Overnight Index Average, abbreviated SONIA, is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market.

Sterling Overnight Interbank Average Rate (SONIA)

A stated annual interest rate is the return on an investment (ROI) that is expressed as a per-year percentage.

The stated annual interest rate, sometimes referred to as SAR, is the return on an investment (ROI) that is expressed as a per-year percentage. When banks charge interest, the stated interest rate is often used instead of the effective annual interest rate to make consumers believe that they are paying a lower interest rate. Often described as “interest on interest,” compound interest makes a sum grow at a faster rate than simple interest or going with a stated annual rate—as this is only calculated on the principal amount as stated above. Over the course of the year, this account will earn $1,047.13 in interest, at an effective annual interest rate of 10.47%, which is notably higher than the returns on the 10% stated annual interest rate of the CD. Unlike the effective annual interest rate, or EAR, this interest rate does not take the effect of compound interest into account.

Stated Annual Interest Rate

Stockholm Interbank Offered Rate (STIBOR) is the official interbank offer rate for short-term loans in Sweden.

The Swedish Financial Benchmark Facility Takes Over the Calculation and Administration of Stibor

The Swedish Financial Benchmark Facility (SFBF) Has Today Launched a Public Consultation on the Evolution of STIBOR

Stockholm Interbank Offered Rate (STIBOR) is the benchmark interest rate that banks in Sweden charge each other for overnight and other short-term loans. STIBOR is a reference rate that shows the average of rates at which Swedish banks are willing to lend to one another without collateral. It is a reference rate that shows an average of interest rates that banks active in the Swedish money market are willing to lend to each other without collateral at different maturities. In March 2021, the Swedish Financial Benchmark Facility announced the public consultation phase of its review to bring more transparency to STIBOR and align the benchmark with international standards. In March 2021, the Swedish Financial Benchmark Facility launched the public consultation phase of its review to bring more transparency to STIBOR.

Stockholm Interbank Offered Rate (STIBOR)

A target rate is a key interest rate that a central bank targets to guide monetary policy.

Also known as an operating target, a target rate is a key interest rate in an economy that the central bank uses to guide and gauge the effectiveness of its monetary policy. A change in a target rate, such as the federal funds rate, can affect other short-term interest rates, longer-term interest rates, foreign exchange rates, stock prices, the amount of money and credit in the economy, employment, and the prices of goods and services. A target rate is a key interest rate that a central bank uses to guide monetary policy toward the desired economic outcomes. The central bank adjusts its monetary policy to achieve the desired target rate, with the intent that this will be instrumental in achieving the rates of inflation, national income growth, and employment that are the bank's mandated goals.

Target Rate Defintion

A tight monetary policy refers to central bank policy aimed at cooling down an overheated economy and features higher interest rates and tighter money supply.

New Economic Challenges and the Fed's Monetary Policy Review

Tight, or contractionary monetary policy is a course of action undertaken by a central bank such as the Federal Reserve to slow down overheated economic growth, to constrict spending in an economy that is seen to be accelerating too quickly, or to curb inflation when it is rising too fast. The central bank tightens policy or makes money tight by raising short-term interest rates through policy changes to the discount rate, also known as the federal funds rate. Tightening policy occurs when central banks raise the federal funds rate, and easing occurs when central banks lower the federal funds rate. In a tightening policy environment, the Fed can also sell Treasuries on the open market in order to absorb some extra capital during a tightened monetary policy environment. Tight, or contractionary monetary policy is a course of action undertaken by a central bank such as the Federal Reserve to slow down overheated economic growth, to constrict spending in an economy that is seen to be accelerating too quickly, or to curb inflation when it is rising too fast.

Tight Monetary Policy

The time preference theory of interest explains interest rates in terms of people's preference to spend in the present over the future. 

The time preference theory of interest, also known as the agio theory of interest or the Austrian theory of interest, explains interest rates in terms of people's preference to spend in the present over the future. The time preference theory of interest, also known as the agio theory of interest or the Austrian theory of interest, explains interest rates in terms of people's preference to spend in the present over the future. According to Fisher, subjective rate of time preference depends on an individual’s values and situation; a low-income person may have a greater time preference, preferring to spend now since they know that future needs will make saving difficult; meanwhile, a spendthrift may have a lower time preference, preferring to save now since there is less concern about future needs. Irving Fisher’s neoclassical views on the time-preference theory of interest state that time preference relates to an individual’s utility function, or the extent to which one measures the worth or value of goods, and how that individual weighs the trade-off in utility between present consumption and future consumption. The time preference theory of interest, also referred to as the agio theory of interest, helps explain the time value of money.

Time-Preference Theory of Interest

The Vasicek interest rate model predicts interest rate movement based on market risk, time and long-term equilibrium interest rate values.

The Vasicek interest rate model (or simply the Vasicek model) is a mathematical method of modeling interest rate movements based on market risk, time, and long-term equilibrium interest rate values. The Vasicek interest rate model values the instantaneous interest rate using the following equation:
d r t \= a ( b − r t ) d t \+ σ d W t where: W \= Random market risk (represented by a Wiener process) t \= Time period a ( b − r t ) \= Expected change in the interest rate at time  t  (the drift factor) a \= Speed of the reversion to the mean b \= Long-term level of the mean σ \= Volatility at time  t \\begin{aligned} &dr\_t = a ( b - r^t ) dt + \\sigma dW\_t \\\\ &\\textbf{where:} \\\\ &W = \\text{Random market risk (represented by}\\\\ &\\text{a Wiener process)} \\\\ &t = \\text{Time period} \\\\ &a(b-r^t) = \\text{Expected change in the interest rate} \\\\ &\\text{at time } t \\text{ (the drift factor)} \\\\ &a = \\text{Speed of the reversion to the mean} \\\\ &b = \\text{Long-term level of the mean} \\\\ &\\sigma = \\text{Volatility at time } t \\\\ \\end{aligned} ​drt​\=a(b−rt)dt+σdWt​where:W\=Random market risk (represented bya Wiener process)t\=Time perioda(b−rt)\=Expected change in the interest rateat time t (the drift factor)a\=Speed of the reversion to the meanb\=Long-term level of the meanσ\=Volatility at time t​
The model specifies that the instantaneous interest rate follows the stochastic differential equation, where _d_ refers to the derivative of the variable following it.
In the absence of market shocks (i.e., when _d_Wt = 0) the interest rate remains constant (rt = b). The Vasicek interest rate model (or simply the Vasicek model) is a mathematical method of modeling interest rate movements based on market risk, time, and long-term equilibrium interest rate values. The Vasicek model predicts where interest rates will end up at the end of a given period of time, given current market volatility, the long-run mean interest rate value, and a given market risk factor. Essentially, it predicts where interest rates will end up at the end of a given period of time, given current market volatility, the long-run mean interest rate value, and a given market risk factor.

Interest Rates

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Terms in Interest Rates