rate

Examples of rate in the following topics:

• Differences Between Real and Nominal Rates

  • Nominal rate refers to the rate before adjustment for inflation; the real rate is the nominal rate minus inflation: r = R - i or, 1+r = (1+r)(1+E(r)).
  • The real rate is the nominal rate minus inflation.
  • Where r is the real rate, i is the inflation rate, and R is the nominal rate.
  • The real rate can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate: 1 + i = (1+r) (1+E(r)), where i = nominal interest rate; r = real interest rate; E(r) = expected inflation rate.
  • In this analysis, the nominal rate is the stated rate, and the real rate is the rate after the expected losses due to inflation.

• The Interest Rate Risk

  • Interest rates became volatile during the 1980s, forcing banks to become more concerned with interest-rate risk.
  • On the other hand, the fixed-rate assets and liabilities are not sensitive to interest rate changes.
  • If the interest-rate sensitive liabilities exceed the interest-rate sensitive assets, then rising interest rates cause banks' profits to plummet, while falling interest rates cause banks' profits to increase.
  • If the interest-rate sensitive liabilities equal the interest-rate sensitive assets, then fluctuating interest rates do not affect bank profits.
  • For example, a variable interest rate mortgage is an adjustable-rate mortgage (ARM).

• Introducing Exchange Rates

  • In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
  • In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another.
  • The spot exchange rate refers to the current exchange rate.
  • In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers.
  • The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency.

• NPV Profiles

  • The NPV Profile graphs the relationship between NPV and discount rates.
  • When the discount rate is large, there are larger differences between PV and FV (present and future value) for each cash flow than when the discount rate is small.
  • Thus, when discount rates are large, cash flows further in the future affect NPV less than when the rates are small.
  • A special discount rate is highlighted in the IRR, which stands for Internal Rate of Return.
  • It is the discount rate at which the NPV is equal to zero.

• Overall Reaction Rate Laws

  • Rate laws for reactions are affected by the position of the rate-determining step in the overall reaction mechanism.
  • Since the first step is the rate-determining step, the overall reaction rate for this reaction is given by this step: $\text{rate}=k[H_2][ICl]$.
  • Step two is the slow, rate-determining step, so it might seem reasonable to assume that the rate law for this step should be the overall rate law for the reaction.
  • At equilibrium, the rate of the forward reaction will equal the rate of the reverse reaction.
  • We can now substitute this expression into the rate law for the second, rate-determining step.

• Macroeconomic Factors Influencing the Interest Rate

  • Taylor explained the rule of determining interest rates using three variables: inflation rate, GDP growth, and the real interest rate.
  • An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market.
  • According to Taylor's original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP:
  • In this equation, it is the target short-term nominal interest rate (e.g., the federal fund rates in the United States), πt is the rate of inflation as measured by the GDP deflator, π*t is the desired rate of inflation, r*t is the assumed equilibrium real interest rate, yt is the logarithm of real GDP, and y*t is the logarithm of potential output, as determined by a linear trend.
  • Taylor explained the rule in simple terms using three variables: inflation rate, GDP growth, and the equilibrium real interest rate.

• Spot Rates, Forward Rates, and Cross Rates

  • Spot & forward rates are settlement prices of spot & forward contracts; cross rates are the exchange rate between two unofficial currencies.
  • The settlement price (or rate) is called a "spot price" or "spot rate. "
  • In other words, spot rates can be used to calculate forward rates.
  • A cross rate is the currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in.
  • However, if the exchange rate between the euro and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.

• Bond Rating System

  • The credit rating is a financial indicator assigned by credit rating agencies; bond ratings below BBB-/Baa are considered junk bonds.
  • It is analogous to credit ratings for individuals.The credit rating is a financial indicator to potential investors of debt securities, such as bonds.
  • Credit rating agencies registered as such with the SEC are "Nationally recognized statistical rating organizations. " The following firms are currently registered as NRSROs: A.M.
  • Best Company, Inc.; DBRS Ltd.; Egan-Jones Rating Company; Fitch, Inc.; Japan Credit Rating Agency, Ltd.; LACE Financial Corp.; Moody's Investors Service, Inc.; Rating and Investment Information, Inc.; and Standard & Poor's Ratings Services.
  • Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as withdrawn and not rated.

• The Discount Rate

  • The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from the Fed's lending facility, the discount window.
  • The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates.
  • (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve, at times, uses the term "discount rate" to mean the primary credit rate. ) The discount rate on secondary credit is above the rate on primary credit.
  • The discount rate for seasonal credit is an average of selected market rates.
  • The discount rates for the three lending programs are the same across all reserve banks except on days around a change in the rate.

• The Federal Funds Rate

  • The Federal Funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve.
  • The Federal Funds rate (or fed funds rate) is the interest rate at which depository institutions (primarily banks) actively trade balances held at the Federal Reserve.
  • The Federal Funds rate is directly related to the interest rate paid by firms and individuals.
  • In fact, many mortgages and credit card interest rates are indexed to the Federal Funds rate - a homeowner might pay an adjustable interest rate that is set at the level of the Federal Funds rate plus four percent, for example.
  • The Fed doesn't control the Federal Funds rate directly - it is negotiated between borrowing and lending banks - but it does set a target interest rate and uses open market operations in order to achieve that rate.