Arbitrage involves entering into financial transactions to obtain risk-free profits by leveraging differences in interest rates, exchange rates, or commodity prices between different markets.
Asset allocation is a strategic approach involving the distribution of investments among various asset classes to optimize returns while minimizing risk. Asset proportions can be adjusted based on market conditions.
Assumption of mortgage involves assuming the obligations of a mortgagor toward a mortgagee, usually as part of the purchase price of real estate. This entails the purchaser taking personal liability for the debt unless a novation releases the original borrower.
A bank loan, also known as a bank advance, is a specified sum of money lent by a bank to a customer for a specific period at a specified rate of interest.
A barometer is a selective compilation of economic and market data designed to represent larger trends. Common barometers include consumer spending, housing starts, interest rates, and prominent stock market indices like the Dow Jones Industrial Average and Standard & Poor's 500 Stock Index.
A basis point is a unit of measure equal to one hundredth of one percent, used primarily in finance to denote changes in interest rates, bond yields, and other percentages that involves fine margins.
The Black-Scholes Option Pricing Model, developed by Fischer Black and Myron Scholes, is a mathematical model used to determine the fair value of options by incorporating factors such as volatility, interest rates, stock prices, exercise prices, and time until expiration.
The seven-member managing body of the Federal Reserve System, commonly called the Federal Reserve Board, which sets policy on banking regulations and the money supply.
The bond discount is the difference between a bond's current market price and its higher face value or maturity value. This phenomenon occurs when bonds are issued below par value or due to market conditions such as rising interest rates or heightened default risk.
A borrower is a person who has received a loan and is obligated to repay the amount borrowed (principal) with interest and other fees, according to the loan terms.
The interest rate at which stockbrokers borrow from banks to cover the securities positions of their clients, typically hovering close to the prime rate.
A buy down involves paying extra upfront to a lender in exchange for a lower interest rate on a mortgage loan. This lower rate can apply to either the entire loan term or part of it.
A callable security can be redeemed by the issuer before its scheduled maturity date, usually triggering a necessity for extra payment to the holder, identified as a call premium.
A Certificate of Deposit (CD) is a debt instrument issued by a bank that usually pays interest. Institutional CDs are issued in denominations of $100,000 or more, while individual CDs start as low as $100. Maturities range from a few weeks to several years. Interest rates are set by competitive forces in the marketplace.
A Certificate of Deposit (CD) is a negotiable certificate issued by a bank in return for a term deposit, offering competitive interest rates and intended for attracting larger investors.
A committed facility is an agreement between a bank and a customer that ensures the bank will provide funds up to a specified maximum at a pre-agreed interest rate, typically for a specified period.
A construction loan is a short-term real estate loan utilized to finance building costs. Funds are disbursed as needed or according to a prearranged plan, repaid upon project completion, often from a mortgage loan. These loans typically come with higher interest rates and origination fees.
The contract interest rate, also known as the face interest rate or nominal interest rate, is the stated annual interest rate on a loan or bond, before any adjustments for compounding or inflation.
Government economic policies designed to dampen the effects of the business cycle, such as the Federal Reserve Board's action during the early 1980s inflation to raise interest rates and reduce demand.
A credit card is a plastic card issued by a bank or finance organization allowing the holder to make purchases in shops, hotels, restaurants, petrol stations, etc., on credit.
Legislation designed to curb fees, interest rate increases, and other abusive practices by credit card companies. The legislation went into effect fully in February 2010.
Credit rationing refers to the allocation of loans to creditworthy borrowers by means other than pure market mechanisms. This often occurs when interest rates are maintained below the level that an unregulated market would set, resulting in excess demand for loans.
Crowding out occurs when heavy federal borrowing leads to higher interest rates, which subsequently reduces the borrowing ability of businesses and consumers.
A cyclical industry is characterized by frequent variations in output, often influenced by seasonal changes and broader economic cycles. This is evident in industries like construction, which experiences reduced activity during winter and fluctuates with changes in interest rates and demand.
Deficit financing refers to the practice by a government agency of borrowing funds to cover a revenue shortfall. While this method can stimulate the economy in the short term, prolonged deficit financing may drive up interest rates and eventually slow economic growth.
A deposit account is a type of bank account held at a financial institution that allows the account holder to accumulate funds and earn interest, while typically requiring advance notice to withdraw money.
A deposit account is a bank account that allows a person to deposit money and earn interest while keeping the funds accessible for withdrawals and transactions.
A discounted loan is a financial instrument that is offered or traded for less than its face value. It involves an initial discount from the loan's nominal amount, effectively making it cheaper for the borrower at inception.
Drop Lock is a financial mechanism applied to bonds initially issued with variable rates of interest, converting them into fixed-rate bonds upon the occurrence of a trigger event such as the underlying index or interest rate falling below a pre-set threshold.
Duration is a measure often used in fixed-income investing to assess the sensitivity of a bond's price to changes in interest rates by calculating the average life of the discounted values of the cash flows associated with a bond.
Easy money refers to a state of the national money supply when the Federal Reserve System allows ample funds to build in the banking system, resulting in lowered interest rates and increased loan accessibility, which encourages economic growth and can potentially lead to inflation.
Econometrics involves using computer analysis and statistical modeling techniques to mathematically describe numerical relationships between key economic forces such as labor, capital, interest rates, and government policies, and test the effects of changes in economic scenarios.
The total interest paid or earned in a year, expressed as a percentage of the principal amount at the beginning of the year. The Effective Annual Rate provides a clear picture of the actual annual cost or earnings, considering compounding periods during the year.
Effective Yield is a measure of the actual return earned on an investment, taking into account the effects of compounding interest.
EONIA serves as the overnight reference rate for the eurozone interbank market, reflecting the weighted average of all overnight unsecured lending transactions in the interbank market as reported by a panel of contributing banks.
Equivalent Taxable Yield is a comparison of the taxable yield on a corporate bond with the tax-free yield on a municipal bond. Depending on the tax bracket, an investor's after-tax return may be greater with a municipal bond than with a corporate bond offering a higher interest rate.
Euribor, or the Euro Interbank Offered Rate, is a key benchmark rate based on the average interest rates at which European banks lend funds to one another in the interbank market.
Euribor is the rate of interest at which banks within the Eurozone lend to one another. It's crucial for determining interest rates for various financial products throughout the region.
The European Central Bank (ECB) is the central bank of the European Union, established in 1998. It is responsible for eurozone monetary policy, particularly the setting of interest rates, and operates independently of national governments.
Federal funds are reserve balances that private banks in the U.S. hold at Federal Reserve banks. These funds are used for various types of inter-bank transactions, including lending to other banks that have insufficient reserves.
Non-interest-bearing deposits held at the US Federal Reserve System that are traded between member banks. The Federal funds rate or Fed funds rate is the overnight rate paid on these funds.
The Federal Funds Rate is the interest rate at which depository institutions (such as banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. This rate is pivotal in the financial system as it influences many other interest rates, such as those for savings accounts, loans, and mortgages, and it's a key indicator of monetary policy direction in the United States.
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System that determines the direction of monetary policy specifically by directing open market operations.
A finance company provides various types of loans, typically at higher interest rates compared to traditional banks, often catering to ventures and individuals considered high risk.
Financial futures are futures contracts based on a financial instrument. These contracts generally move inversely with interest rates.
Financial futures refer to standardized futures contracts that involve financial assets such as currencies, interest rates, or other financial instruments. These contracts are exchange-traded and play a vital role in hedging and portfolio management.
The Fisher Effect is an economic theory proposed by American economist Irving Fisher, which describes the relationship between nominal interest rates and real interest rates under the impact of inflation.
A floating-rate loan has an interest rate that is not fixed and can fluctuate over the loan's tenure. These loans are often tied to short-term market indicators like the London Inter Bank Offered Rate (LIBOR).
Understanding fluctuation is crucial within the realms of finance, economics, and business operations. It encapsulates the variability seen in prices, interest rates, and broader economic indicators, often influencing decision-making processes for investors, businesses, and policymakers.
The rate of interest that will apply to a loan or deposit beginning on a future date and maturing on a second future date. It is a crucial concept in financial markets for managing interest rate risk.
Half-life in finance refers to the point in time at which half the principal has been repaid in a mortgage-backed security, including amortization and retirements.
A Home Equity Line of Credit (HELOC) is a type of home equity loan that establishes an account the borrower can draw upon as desired, with a maximum outstanding debt limit similar to a credit card.
An important economic indicator that offers an estimate of the number of dwelling units on which construction has begun during a stated period. The number of housing starts is closely related to interest rates and other basic economic factors.
Inflation targeting is a monetary policy strategy where a central bank sets an explicit target rate for inflation and uses tools such as interest rate adjustments to achieve this target. This policy was first adopted by New Zealand in 1990 and has since been implemented by over 50 countries, including the UK and a more flexible approach by the USA.
The Inter Bank Offered Rate (IBOR) is the average interest rate at which a selection of banks on the interbank market is prepared to lend to one another.
The interbank rate is the interest rate that banks charge one another for short-term loans, enabling them to manage liquidity and meet regulatory requirements.
Interest cover, also known as the fixed-charge-coverage ratio, is a financial metric used to assess a company’s ability to meet its interest obligations from its earnings before interest and tax (EBIT).
Interest sensitive policies are a newer generation of life insurance policies that are credited with interest currently being earned by insurance companies on these policies, ensuring that policyholders can potentially benefit from favorable economic conditions.
An inverted yield curve is an unusual financial phenomenon where short-term interest rates exceed long-term rates, often seen as a precursor to economic recessions.
An investment strategy is a plan to allocate assets among various investment choices such as stocks, bonds, cash equivalents, commodities, and real estate. An effective investment strategy considers factors like interest rates, inflation, economic growth, the investor's age, risk tolerance, available capital, and future capital needs.
A certificate of deposit with a minimum denomination of $100,000, commonly utilized by large institutions. Jumbo CDs often offer higher interest rates compared to smaller-denomination CDs.
The London Inter Bank Bid Rate (LIBID) represents the interest rate banks are willing to pay for interbank deposits in the London interbank market.
LIBOR, an acronym for the London Inter Bank Offered Rate, is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
An overview of the London International Financial Futures and Options Exchange (LIFFE) which provides facilities for trading in options and futures contracts including those on government bonds, share indexes, foreign currencies, and interest rates.
Liquidity preference is an element of Keynesian economic theory that examines the relative preference of investors to hold money rather than bonds or other investments. It influences the level of economic activity and is related to interest rates and return on investment (ROI).
A liquidity trap is an economic situation where adding liquidity through increased money supply and lowered interest rates fails to stimulate borrowing, lending, consumption, and investment. It can sometimes be escaped through fiscal policy or distributing money directly to people.
A locked-in interest rate is a rate promised by a lender at the time of loan application. The promise is a legal commitment of the lender, though there may be qualifications or contingencies that allow the lender to charge a higher rate. On home loans, the lock-in is customarily provided for 1% of the amount borrowed, though often it is free of charge. However, many prospective lenders find ways to renege on commitments when interest rates rise.
The Lombard Rate refers to the interest rate at which the German central bank, the Bundesbank, lends to German commercial banks, typically ½% above the discount rate. It can also refer to the interest rate charged by a European commercial bank on loans secured by marketable assets.
The London Inter Bank Mean Rate (LIMEAN) represents the mean of bid and offer rates offered by major banks on the London interbank market. It is used as a benchmark for interest rates and financial pricing.
Learn about the London Inter Bank Mean Rate (LIMEAN), its definition, examples, frequently asked questions, related terms, and additional resources.
The London Interbank Bid Rate (LIBID) is the interest rate at which banks bid for funds to borrow from one another in the London interbank market. It is considered the counterpart to the London Interbank Offered Rate (LIBOR).
The London Interbank Offered Rate (LIBOR) is the interest rate that the most creditworthy international banks dealing in Eurodollars charge each other for large loans. Serving as the equivalent of the federal funds rate, LIBOR is often used as a base rate for other large Eurodollar loans issued to less creditworthy corporate and government borrowers.
LIBOR, or the London InterBank Offered Rate, is the rate at which banks offer to lend to each other on the London interbank market. It serves as a global benchmark for interest rates on loans and financial instruments, with terms ranging from overnight to five years.
Macroeconomics is the branch of economics that studies an economy as a whole, focusing on large-scale factors such as national productivity and inflation, and how various sectors and factors interrelate to form a broader economic landscape.
Market Timing refers to the strategic decision-making process of buying or selling securities based on economic conditions, interest rates, stock price directions, and trading volumes.
A bond with a maturity of 2 to 10 years, considered to be between short-term and long-term bonds in terms of maturity and risk.
Monetary policy comprises the procedures by which governments or central banks try to affect macroeconomic conditions by influencing the supply of money. This can be achieved through various mechanisms aside from printing more money, including open-market operations, adjusting reserve requirements, and changing interest rates.
The committee of Bank of England officials and outside economic experts that has been responsible for setting interest rates in the UK since 1997. Prior to this date, interest rates were set by the Treasury.
The Monetary Policy Committee (MPC) is a body within central banks that is responsible for setting the interest rates and other monetary policies to achieve economic stability and growth.
An agreement between a bank and a company that provides the company with the ability to borrow up to a certain limit each day in the money markets, typically on a short-term basis, often overnight or up to one month.
A Mortgage REIT is a type of Real Estate Investment Trust that lends stockholder capital to real estate builders and buyers. Mortgage REITs also borrow from banks and relend that money at higher interest rates.
A negative yield curve, also referred to as an inverted yield curve, occurs when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality, often indicating an imminent economic recession.
Open-market rates refer to the interest rates on various debt instruments bought and sold in the open market, which are directly responsive to supply and demand. These rates differ from the discount rate set by the Federal Reserve Board.
An overdraft is a loan provided by a bank or building society for a customer with a cheque account, allowing the account to go into debit, up to a specified limit known as the overdraft limit.
Per annum, a Latin term meaning 'each year' or 'annually,' is used across various fields to denote the yearly occurrence or rate of an event.
A positive yield curve, also known as a normal yield curve, reflects a usual situation where interest rates are higher on long-term debt securities than on short-term debt securities of the same quality, indicating investor expectations for future economic growth.
Quantitative Easing 2, often abbreviated as QE2, was a controversial monetary policy program implemented by the U.S. Federal Reserve in 2010 to purchase $600 billion in U.S. Treasury bonds. The program aimed to reduce interest rates and stimulate economic growth but raised concerns about potential inflation.
Quantitative Easing (QE) is a non-traditional monetary policy used by central banks to stimulate the economy by increasing the money supply and lowering interest rates.
Quantitative Easing (QE) is a monetary policy tool used primarily by central banks to stimulate the economy by purchasing long-term securities in the open market, thereby increasing the money supply and lowering interest rates to boost economic activity.
The rate of interest charged for the use of financial resources adjusted for the effect of the inflation rate within an economy.
The rediscount rate is the interest rate charged to commercial banks and other depository institutions when they borrow funds from the Federal Reserve through its discount window.
A bank nominated under the terms of a loan agreement to provide the marker rates for the purposes of fixing interest charges on a variable-rate loan.
A Reference Rate is an interest rate benchmark used as a basis for pricing financial products such as loans, mortgages, and derivatives. It is crucial for consistent pricing across financial markets.
Refi, short for refinanced mortgages, refers to the volume of mortgage loans originating from the refinancing of existing debt. This financial process involves replacing an existing mortgage with a new one, typically to achieve better interest rates, reduce monthly payments, or alter loan terms.
Refinancing involves obtaining new funding to pay off an existing obligation, typically done to secure a more favorable interest rate or reduce monthly payments.
The term 'RICH' has various meanings in finance and everyday language, from denoting high-valued securities or interest rates to simply describing wealth.
A type of mortgage commonly used in Canada in which the amortization of the principal is based on a long term, but the interest rate is established for a much shorter term. The loan may be extended, or rolled over, at the end of the shorter term at the current market interest rate.
A bank or building-society account designed for the investment of personal savings. These accounts typically offer higher interest rates than deposit and current accounts. Some accounts provide instant access to funds, while others require notice to be given, typically 30, 60, or 90 days.
A method used in decision making to evaluate the impact of variations in key variables on projected outcomes, helping to identify the degree of risk associated with a decision.
Social lending, also known as peer-to-peer (P2P) lending, is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary.
