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Risk-Free Interest Rate The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no risk.
Interest Rate An interest rate is the "rental" price of money. When a resource or asset is borrowed, the borrower pays interest to the lender for the use of it. The interest rate is the price paid for the use of money for a period of time. One type of interest rate is the yield on a bond.
Interest Rate Swap In the field of derivatives trading, a popular form of swap is the interest rate swap, in which one party exchanges a stream of interest for another stream. Interest rate swaps can be fixed-to-floating, fixed-to-fixed or floating-to-floating rate swaps. Interest rate swaps are often used by companies to re-allocate their exposure to interest-rate fluctuations, typically by exchanging fixed-rate obligations for floating rate obligations.
Example:
Interest Rate Basis In accounting and finance, the accrual basis of an interest calculation is a convention whereby an interest amount is calculated from the principal, expressed in units of a specified currency, and a percentage, and an agreed start and end date. The more commonly used conventions are listed below.
SemiAnnual:
This is commonly used for bond coupon calculation.
Actual 365:
Interest Rate Cap And Floor Interest rate cap: An interest rate cap is a series of European call options or caplets on a specified interest rate, usually the LIBOR interest rate. The underlying rate is known as the reference rate. The buyer of the cap receives money if on the maturity of any of the caplets, the reference rate exceeds the agreed strike price of the cap.
In formulas a caplet payoff on a rate L struck at K is
Zero Interest Rate Policy The zero interest rate policy (ZIRP) is Keynsian macroeconomics scheme for economies exhibiting slow growth with a very low interest rate, such as contemporary Japan. The Keynsian (and neo-Keynsian) thesis is that these countries are in the so-called liquidity trap, an assessment with which neoclassical economics disagrees.
Interest Rate Derivative An interest rate derivate is a derivative security where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate.
Interest rate derivatives are the largest derivatives market in the world. Market observers estimate that $60 trillion dollars by notional value of interest rate derivatives contract had been exchanged by May 2004.
Nominal Interest Rate When comparing interest rates, nominal interest rates and effective interest rates have to be distinguished. An interest rate is called nominal if the period of time after that the interest is credited (e.g. a month) is not identical to the basic time unit (normally a year).
Effective Interest Rate In contrast to a nominal interest rate, the period of time after that the interest is credited coincides with the basic time unit (normally one year). Thus, given an interest rate of i, an initial capital is increased by the factor (1+i) after each time unit.
See also:: * Interest * Interest rate * Nominal interest rate * list of finance topics
Interest Rate Future An Interest Rate Future is a futures contract with an interest bearing instrument as the underlying asset.
Examples include Treasury-bill futures, Treasury-bond futures, LIBOR futures, EuroDollar futures.