What Is an Interest Expense? An interest expense is the cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. It represents interest payable on any borrowings—bonds, loans, convertible debt or lines of credit. It is essentially calculated as the interest rate times the outstanding principal amount
What Is Interest-On-Interest? Interest-on-interest, also referred to as ‘compound interest’, is the interest that is earned when interest payments are reinvested. Interest-on-interest is primarily used in the context of bonds, whose coupon payments are assumed to be re-invested and held until the bond is sold or matures. Key Takeaways Interest-on-interest, also referred to as ‘compound
What Is an Interest-Only ARM? An interest-only adjustable-rate mortgage (ARM) is a type of mortgage loan in which the borrower is only required to pay the interest portion owed each month for a certain period of time. During the interest-only period, only interest accrued each period must be paid, and a borrower is not required
What Is an Interest-Only Mortgage? An interest-only mortgage is a type of mortgage in which the mortgagor (the borrower) is required to pay only the interest on the loan for a certain period. The principal is repaid either in a lump sum at a specified date, or in subsequent payments. Key Takeaways An interest-only mortgage
What Is an Interest Rate? The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR). An interest rate can also apply to the amount earned
What Is an Interest Rate Ceiling? An interest rate ceiling is the maximum interest rate permitted in a particular transaction. It is the opposite of an interest rate floor. Financial lending instruments may include an interest rate ceiling as part of their contract provisions. They are commonly used in adjustable-rate mortgage agreements (ARMs). KEY TAKEAWAYS
What Is an Interest Rate Collar? An interest rate collar is a relatively low-cost interest rate risk management strategy that uses derivatives to hedge an investor’s exposure to interest rate fluctuations. Key Takeaways An interest rate collar uses options contracts to hedge interest rate risk to protect variable rate borrowers against rising rates or lenders
What Is an Interest Rate Derivative? An interest rate derivative is a financial instrument with a value that is linked to the movements of an interest rate or rates. These may include futures, options, or swaps contracts. Interest rate derivatives are often used as hedges by institutional investors, banks, companies, and individuals to protect themselves
What Is an Interest Rate Differential (IRD)? An interest rate differential (IRD) weighs the contrast in interest rates between two similar interest-bearing assets. Most often it is the difference between two interest rates. Traders in the foreign exchange market use IRDs when pricing forward exchange rates. Based on the interest rate parity, a trader can
What Is an Interest Rate Floor? An interest rate floor is an agreed-upon rate in the lower range of rates associated with a floating rate loan product. Interest rate floors are utilized in derivative contracts and loan agreements. This is in contrast to an interest rate ceiling (or cap). Interest rate floors are often used in
