Glossary

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Glossary
Interest rate

Interest rate

The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned

An interest rate can also apply to the amount earned at a bank or credit union from a savings account or certificate of deposit (CD). Annual percentage yield (APY) refers to the interest earned on these deposit accounts.

Interest rate arbitrage or interest rate relative value

Interest rate arbitrage funds or interest rate relative value funds invest in debt and seek to profit from predicting moves in interest rates (yields). They are often market neutral and may be quite highly leveraged as they seek to exploit small changes in value.

repo rate

Repo rate is effectively the interest rate at which central banks lend money to banks. ‘repo’ is an abbreviation used for repurchase agreement. It is used as a form of short-term borrowing by the banks who sell government securities (usually short-term securities) to the central bank and agree to buy them back at a slightly […]

Equity Discount Rate

Equity Discount Rate is the cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount rate is the interest rate used to determine the present value of future cash flows in standard discounted cash flow analysis. Subscribe for free equity research on investment trusts, funds and listed companies

Margin Account

A margin account involves borrowing funds from your broker-dealer to purchase securities, using the account as collateral. You will also be required to pay a periodic interest rate to the broker. A margin account can increase your purchasing power however it can also expose you to greater losses.

OIS

OIS is an acronym for overnight indexed swap. Banks and other financial institutions swap exposure from fixed interest rates to floating interest rates and vice versa. The swap is for the same period (tenor). So a swap of a known fixed rate of interest for a period is for a best estimate of what the […]

yield curve

The yield curve plots the interest rates of bonds, that have equal credit quality, at a set point in time, against differing maturity dates. This curve is used to predict changes in economic output and growth. There are three main types of yield curve: normal, inverted and flat (or humped). A normal curve is one […]

Euribor

Euribor is the abbreviation for Euro Interbank Offered Rate. The Euribor rates are based on the average interest rates at which a large panel of European banks borrow funds from one another. There are different maturities, ranging from one week to one year. The Euribor rates are considered to be the most important reference rates in the […]

SONIA

SONIA is the abbreviation for the Bank Of England’s Sterling Overnight Index Average and was first introduced in March 1997. SONIA is a widely used interest rate benchmark and the reference rate for sterling Overnight Indexed Swaps (OIS). The Bank of England became its administrator in April 2016, and introduced a series of reforms of the benchmark in April […]

Duration

Duration, in the context of a bond, is used as a measure of the sensitivity of a bond to changes in interest rates. Expressed in years, it represents the weighted average of the time it will take to receive all the cash flows from a bond. A bond with most of its cash flows due […]

Tenor

Tenor has two main uses within finance. It is most commonly used to describe the amount of time left until the repayment of a loan or until a financial contract expires. It is similar to ‘maturity’ but tenor is traditionally used for non-standardised contracts, for example foreign exchange and interest rate swaps, whilst maturity is […]