A floating rate , also known as the variable or adjustment rate , refers to any type of debt instrument, such as loans, bonds, mortgages, or credit , which has no fixed interest rate for the life of the instrument.
Floating rates usually change based on reference levels (a benchmark of all financial factors, such as the Consumer Price Index). One of the most common reference levels to use as a basis for applying floating rates is the London Inter-bank Offered Rate, or LIBOR (the rate at which major banks lend each other).
The rate for the debt will usually be referred to as a spread or margin over the base rate: for example, a five-year loan can be valued at a six-month LIBOR of 2.50%. At the end of each six-month period, rates for the next period will be based on LIBOR at that time (reset date), plus spreads. The basis will be agreed between the borrower and the lender, but 1, 3, 6 or 12 months of market interest rates are usually used for commercial loans.
Typically, a floating interest rate loan will cost less than a fixed interest rate loan, depending on the part on the yield curve. In return for paying a lower loan rate, the borrower takes interest rate risk: the risk that interest rates will rise in the future. In cases where the yield curve is reversed, the cost of borrowing at a floating rate may actually be higher; in many cases, however, lenders require higher interest rates for long-term fixed interest rates, as they bear interest rate risk (risking that interest rates will go up, and they will earn lower interest income than they should have ).
Some types of floating interest rate loans, especially mortgages, may have other special features such as an interest rate limit, or a maximum interest rate limit or a maximum change in the allowable interest rate.
Video Floating interest rate
Floating rate loan
In business and finance, a floating rate loan (or variable or adjusted rate loan) refers to a floating rate loan. The total rate paid by the customer "floats" in relation to some base level, which spreads or margins are added (or less often, reduced). The loan term may be much longer than the base from which floating interest rate loans are valued; for example, a 25-year mortgage can be priced from the main 6-month loan rate.
Floating rate loans are common in the banking industry and for large corporate customers. The floating mortgage rate is a floating rate mortgage, as opposed to a fixed rate.
In many countries, floating interest rates and mortgage loans are very dominant. They can be referred to by different names, such as adjustable interest rate mortgages in the United States. In some countries, there may not be a specific name for this type of loan or mortgage, since floating interest rate loans may be the norm. For example, in Canada substantially all mortgages are floating rate mortgages; the borrower may choose to "fix" the interest rate for each period between six months and ten years, even though the actual loan term may be 25 years or more.
Floating rate loans are sometimes referred to as bullet loans, although they are different concepts. In the form of bullet loans, large payments ("bullets" or "balloons") are paid at the end of the loan, compared to the capital and interest loans, where the payment pattern incorporates the entire loan rate payment, each containing a capital element, and no bullet payment at the end. Therefore, floating interest rate loans may or may not combine bullet payments.
Maps Floating interest rate
Contoh
The customer borrows $ 25,000 from the bank; the terms of the loan are (six months) LIBOR 3.5%. At the time of issuing the loan, the LIBOR rate is 2.5%. During the first six months, the borrower pays the bank a 6% annual interest: in this simplified case of $ 750 for six months. At the end of the first six months, the LIBOR rate has increased to 4%; the client will pay 7.5% (or $ 937.5) for the second half of this year. At the beginning of the second year, the LIBOR rate is now down to 1.5%, and the cost of the loan is $ 625 for after six months.
Interest rate options can protect the floating rate of interest rates - for example, the interest rate limit ensures that the borrower's future cash flows will not exceed the specified standard level.
See also
- Fixed interest
References
Source of the article : Wikipedia
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