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
What Is an Interest Rate Future? An interest rate future is a futures contract with an underlying instrument that pays interest. The contract is an agreement between the buyer and seller for the future delivery of any interest-bearing asset. The interest rate futures contract allows the buyer and seller to lock in the price of
What Is an Interest Rate Index? 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 serves as a benchmark to calculate the interest rate that lenders may charge on financial products, such as mortgages. Key Takeaways An Interest rate index
What Is an Interest Rate Reduction Refinance Loan (IRRRL)? An interest rate reduction refinance loan (IRRRL) is a type of mortgage offered by the U.S. Department of Veterans Affairs (VA) to veterans and military families. Also known as the VA Streamline Refinance Program, the IRRRL is a VA-to-VA-loan process, designed to allow homeowners who already
What Is Interest Rate Risk? Interest rate risk is the potential for investment losses that can be triggered by a move upward in the prevailing rates for new debt instruments. If interest rates rise, for instance, the value of a bond or other fixed-income investment in the secondary market will decline. The change in a
What Is Interest Rate Sensitivity? 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. Securities that are more sensitive have greater price fluctuations than those with less sensitivity. This type of sensitivity must be taken into account
What Are Interest-Sensitive Assets? Interest sensitive assets are financial products whose features and characteristics or their secondary market price are vulnerable to changes in interest rates. The adjustable-rate mortgage is an example. Banks and their customers both are affected by interest-sensitive assets. Key Takeaways Interest-sensitive assets become more profitable or less profitable as lending rates
What Are Interest Sensitive Liabilities? Interest sensitive liabilities are types of short-term deposits with variable interest rates that a bank holds for customers. Interest sensitive liabilities make up a significant amount of the assets of most banks, encompassing money market certificates, savings accounts, and the Super NOW account. Key Takeaways Interest sensitive liabilities are short-term deposits
