Rate risk

Similar financial terms

Corporate sector
Securities issued by U.S. corporations and non-U.S. corporations in the United States. Includes bonds, MTNs, structured notes and commercial paper. The corporate sector is divided into investment grade and non-investment grade sectors by rating agencies such as Moody’s and S&P.

Coupon rate
The interest rate that the issuer of a bond agrees to pay each year to the bondholder. The coupon rate multiplied by the principal of a bond provides the nominal amount of the coupon. For example, a bond with a 5.1% coupon rate and a principal of $1,000 provides an annual interest of $51. The coupon rate is also referred to as the nominal rate.

Interest-rate risk on bonds
The price of a typical bond will change in the opposite direction from a change in interest rates. As interest rates rise, the price of a bond will fall; as interest rates fall, the price of a bond will rise. The actual degree of sensitivity of a bond’s price to changes in market interest rates depends on various characteristics of the issue maturity, coupon and special provisions.

Exchange-rate risk on bonds
A non-domestic-currency nominated bond has unknown domestic currency cash flows. The domestic currency cash flows are dependent on the exchange rate at the time the payments are received. For example, suppose that a German investor purchases a bond whose payments are in British pounds (GBP). If pounds depreciate relative to euros (EUR), fewer euros will be received and vice versa. This risk is also referred to currency risk.

Conglomerate merger
Involve firms engaged in unrelated types of business activity. Among conglomerate mergers, three types have been distinguished: (a) product extensions which broaden the product lines of firms (concentric mergers), (b) geographic market exentions which involves two firms whose operations have been conducted in non-overlapping geographic areas and (c) pure conglomerate mergers which involve unrelated business activities.

Zero-coupon interest rate
The interest rate that would be earned on a bond that provides no coupons.

Term structure of interest rates
The relationship between interest rates and their maturities.

Swap rate
The fixed rate in an interest rate swap that causes the swap to have a value of zero. It can be thought of as the Internal Rate of Return (IRR) of a swap.

Drift rate
The average increase per unit of time in a stochastic process.

Repo rate
The interest rate in a repo transaction.

Indirect exchange rate
The required amount of foreign currency required to purchase on unit of domestic currency.

Internal Rate of Return (IRR)
The internal rate of Return (IRR) is the discount rate that equals the present value of a future steam of cash flows to the initial investment. The IRR can be thought of as the annualized rate of return (in percent) of an investment using compound interest rate calculations. The IRR calculation is very useful when a number of future cash flows on which an interest rate needs to be calculated.

Current intrest rate
The rate being earned on a bond based on its current market value; that value varies with the degree of premium or discount value of the bond.

Discount rate
The loan intrest rate charged by the Federal Reserve Bank to its member banks.

Federal funds rate
The rate charged by the Federal Reserve to member banks when excess reserve loans are made from one bank to another.

Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.

Accelerated depreciation
Any depreciation method that produces larger deductions for depreciation in the early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.

Yield spread strategies
Strategies that involve positioning a portfolio to capitalize on expected changes inyield spreads between sectors of the bond market.

Yield curve strategies
Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve.

Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy.

Adjustable rate preferred stock (ARPS)
Publicly traded issues that may be collateralized by mortgages and MBSs.

After-tax real rate of return
Money after-tax rate of return minus the inflation rate.

All equity rate
The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.

Amortizing interest rate swap
Swap in which the principal or national amount rises (falls) as interest rates rise (decline).

Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.

Variable rate loan
Loan made at an interest rate that fluctuates based on a base interest rate such as the Prime Rate or LIBOR.

Variable rated demand bond
Variable rated demand bond (VRDB) is a floating rate bond that can be sold back periodically to the issuer.

Variable rate CDs
Short-term certificate of deposits that pay interest periodically on roll dates. On each roll date, the coupon on the CD is adjusted to reflect current market rates.

Unemployment rate
The ratio of the number of people classified as unemployed to the total labor force.

Theoretical spot rate curve
A curve derived from theoretical considerations as applied to the yields of actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.

Sustainable growth rate
Maximum rate of growth a firm can sustain without increasing financial leverage.

Structured portfolio strategy
A strategy in which a portfolio is designed to achieve the performance of some predetermined liabilities that must be paid out in the future.

Stopping curve refunding rate
A refunding rate that falls on the stopping curve.

Stock replacement strategy
A strategy for enhancing a portfolio's return, employed when the futures contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills portfolio and a stock portfolio.

Stated annual interest rate
The interest rate expressed as a per annum percentage, by which interest payment is determined.

Spread strategy
Spreading is a strategy that involves a position in one or more options so that the cost of buying an option is funded entirely or in part by selling another option in the same underlying.

Spot rate curve
The graphical depiction of the relationship between the spot rates and maturity.

Spot rate
The theoretical yield on a zero-coupon Treasury security.

Spot interest rate
Interest rate fixed today on a loan that is made today.

Spot exchange rates
Exchange rate on currency for immediate delivery.

Split-rate tax system
A tax system that taxes retained earnings at a higher rate than earnings that are distributed as dividends.

Settlement rate
The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the obligations of a pension plan. The rate at which the pension benefits could be effectively settled off the pension plan wished to terminate its pension obligation.

Risk-free rate
The rate earned on a riskless asset.

Riskless rate of return
The rate earned on a riskless asset.

Retention rate
The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio.

Reinvestment rate
The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security.

Reference rate
A benchmark 'interest rate (such as LIBOR), used to specify conditions of an interest rate swap or an interest rate agreement.

Real interest rate
The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation.

Real exchange rates
Exchange rates that have been adjusted for the inflation differential between two countries.

Rate of return ratios
Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm.

Rate of interest
The rate, as a proportion of the principal, at which interest is computed.

Rate lock
An agreement between the mortgage banker and the loan applicant guaranteeing a specified interest rate for a designated period, usually 60 days.

Rate anticipation swaps
An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investor's assumptions about future changes in interest rates.

Randomized strategy
A strategy of introducing into the decision-making process a random element that is designed to reduce the information content of the decision-maker's observed choices.

Protective put buying strategy
A strategy that involves buying a put option on the underlying security that is held in a portfolio.

Prime rate
The interest rate at which banks lend to their best (prime) customers. Much more often than not, a bank's most creditworthy customers borrow at rates below the prime rate.

Portfolio turnover rate
For an investment company, an annualized rate found by dividing the lesser of purchases and sales by the average of portfolio assets.

Portfolio internal rate of return
The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio.

PIBOR (Paris Interbank Offer Rate)
The deposit rate on interbank transactions in the Eurocurrency market quoted in Paris.

Pass-through coupon rate
The interest rate paid on a securitized pool of assets, which is less than the rate paid on the underlying loans by an amount equal to the servicing and guaranteeing fees.

Pass-through rate
The net interest rate passed through to investors after deducting servicing, management, and guarantee fees from the gross mortgage coupon.

Passive portfolio strategy
A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities.

Pac-Man strategy
Takeover defense strategy in which the prospective acquiree retaliates against the acquirer's tender offer by launching its own tender offer for the other firm.

Overlay strategy
A strategy of using futures for asset allocation by pension sponsors to avoid disrupting the activities of money managers.

Outright rate
Actual forward rate expressed in dollars per currency unit, or vice versa.

Nominal interest rate
The interest rate unadjusted for inflation.

Nominal exchange rate
The actual foreign exchange quotation in contrast to the real exchange rate that has been adjusted for changes in purchasing power.

Nominal annual rate
An effective rate per period multiplied by the number of periods in a year.

Naked option strategies
An unhedged strategy making exclusive use of one of the following: Long call strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying put options ), and short put strategy (selling or writing put options). By themselves, these positions are called naked strategies because they do not involve an offsetting or risk-reducing position in another option or the underlying security.

Multiple rates of return
More than one rate of return from the same project that make the net present value of the project equal to zero. This situation arises when the IRR method is used for a project in which negative cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return.

Mortgage rate
The interest rate on a mortgage loan.

Money rate of return
Annual money return as a percentage of asset value.

Market capitalization rate
Expected return on a security. The market-consensus estimate of the appropriate discount rate for a firm's cash flows.

Marginal tax rate
The tax rate that would have to be paid on any additional dollars of taxable income earned.

Liability funding strategies
Investment strategies that select assets so that cash flows will equal or exceed the client's obligations.

Lease Rate
The payment per period stated in a lease contract.

Ladder strategy
A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.

Computer-Intergrated Manufacturing (CIM)
The intergration of computer control and monitoring into a manufacturing process.

Hurdle Rate
The minimum rate of investment that is acceptable to an investor. It is also used in the context of achieving a certain rate before other events can take place. For example, a fund manager has to achieve a certain hurdle rate for his investors before he is paid a bonus.

Exit strategy
Refers to the way in which investors and founders can "exit", i.e. leave their company, with a cash return on their investment - e.g. by going public or being acquired or being bought out by other shareholders.

Burn Rate
This term is particularly applicable to start up companies or to companies which do not yet have substantial revenues. It refers to the monthly rate of consumption of cash. For example, if total monthly operating costs for rent, salaries, etc are $50K, one would say that the burn rate is $50K/month. When compared to available cash-on-hand it tells us how much time the company has before it will run into serious cash flow difficulties and "flame-out".

Barbell strategy
A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.

Basic business strategies
Key strategies a firm intends to pursue in carrying out its business plan.

Benchmark interest rate
Also called the base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a comparable-maturity Treasury security that was most recently issued ("on-the-run").

Break-even payment rate
The prepayment rate of a MBS coupon that will produce the same CFY as that of a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower than the benchmark coupon the lowest prepayment rate that will do so.

Break-even tax rate
The tax rate at which a party to a prospective transaction is indifferent between entering into and not entering into the transaction.

Bullet strategy
A strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve.

Buy-and-hold strategy
A passive investment strategy with no active buying and selling of stocks from the time the portfolio is created until the end of the investment horizon.

Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Combination strategy
A strategy in which a put and with the same strike price and expiration are either both bought or both sold.

Conglomerate
A firm engaged in two or more unrelated businesses.

Corporate acquisition
The acquisition of one firm by anther firm.

Corporate bonds
Debt obligations issued by corporations.

Corporate charter
A legal document creating a corporation.

Corporate finance
One of the three areas of the discipline of finance. It deals with the operation of the firm (both the investment decision and the financing decision) from that firm's point of view.

Corporate financial management
The application of financial principals within a corporation to create and maintain value through decision making and proper resource management.

Corporate financial planning
Financial planning conducted by a firm that encompasses preparation of both long- and short-term financial plans.

Corporate processing float
The time that elapses between receipt of payment from a customer and the depositing of the customer's check in the firm's bank account; the time required to process customer payments.

Corporate tax view
The argument that double (corporate and individual) taxation of equity returns makes debt a cheaper financing method.

Corporate taxable equivalent
Rate of return required on a par bond to produce the same after-tax yield to maturity that the premium or discount bond quoted would.

Covered call writing strategy
A strategy that involves writing a call option on securities that the investor owns in his or her portfolio. See covered or hedge option strategies.

Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying.

Crediting rate
The interest rate offered on an investment type insurance policy.

Cross rates
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency.

Crossover rate
The return at which two alternative projects have the same net present value.

Current rate method
Under this currency translation method, all foreign currency balance-sheet and income statement items are translated at the current exchange rate.

Corporate Social Responsibility
CSR stands for corporate social responsibility. Some companies defines corporate social responsibility as open and transparent business practices based on ethical values and respect for its stakeholders.

Exchange rate overshooting
A phenomenon whereby the exchange rate changes by more in the short run than it does in the long run when the money supply changes.

Separate Trading of Registered Interest (STRIPS)
Separate Trading of Registered Interest and Principal Securities (STRIPS) are securities that have their periodic interest payments separated from the final maturity payment and the two cash flows are sold to different investors.

Inverted block rate
A cost structure for energy in which each additional block or unit of energy above a given level is charged at a higher rate than preceding blocks. Inverted block rates are most commonly applied to energy delivered to clients who require large portions of their energy during peak demand periods when energy costs are typically higher, or when additional system capacity has to be brought online to meet that client's needs.

Forward exchange rate
The forward exchange rate is a rate for buying foreign exchange at a fixed point in the future. Taking out a forward contract for foreign exchange means that you are agreeing to buy foreign exchange at an agreed rate in the future. The existence of the forward market leads to a considerable amount of speculation.

Fixed exchange rates
A fixed exchange rate system is one where the value of the currency against other currencies remains exactly the same. A fixed exchange rate doesn't stay fixed on its own. Governments have to hold large stocks of foreign exchange, so that they can actively intervene to hold the value of the currency stable. Monetary and fiscal policies will also have to be directed to keeping the rate constant.

Nominal rate of interest
The annual return form lending money expressed as a percentage, without having taken account of the rate of inflation.

Reinvestment risk on bonds
Usually, when the yield of a bond is calculated, you assume that the coupons received before maturity are reinvested. The additional income from such reinvestment is sometimes referred to as interest-on-interest which depends on the prevailing interest-rate levels at the time of reinvestment. Volatility in the reinvestment rate of a given strategy because of changes in market interest rates is called reinvestment risk. This risk is that the interest rate at which interim cash flows can be reinve ...

Call risk on bonds
Many bonds include a call feature that allows the issuer to redeem or “call” all or part of the issue before the maturity date. The issuer usually retains this right in order to have flexibility to refinance the bond in the future if the market interest rate drops below the coupon rate. This implies three risks from the investor: (a) The cash flow pattern becomes uncertain, (b) The investor becomes exposed to reinvestment risk because the issuer will call the bond when interest rates drop, and ( ...

Default risk on bonds
Issuers that potentially run into cash flow problems, simultaneously attaches default risk to their bonds if there is uncertainty whether they can afford to pay coupons and principals. Bonds with default risk trade in the market at a price that is lower than comparable U.S. Treasury securities, which are considered free of default risk. Default risk is gauged by quality ratings assigned by recognised rating companies such as Moody’s Investor Service, Standard & Poor’s Corporation, Morningstar an ...

Inflation risk on bonds
If investors purchase a bond on which they can realize a coupon rate of 5% but the rate of inflation is 6%, the purchasing power of the cash flow actually has declined. Inflation risk arises because of the variation in the value of cash flows from a security due to inflation, as measured in terms of purchasing power.

Liquidity risk on bonds
The primary measure of liquidity is the size of the bid-ask spread. Liquidity risk depends on the ease with which an issue can be sold at or near its value. It follows that the wider the dealer spread, the more liquidity risk.

Risk arbitrage
The practice of buying the stock of takeover targets after a merger is publicly announced and hold the stock until the deal is officially accomplished.

Systematic risk
The systematic risk of an asset or portfolio is the risk that cannot be diversified away.

Volatility risk
The risk in the value of options portfolios due to the unpredictable changes in the volatility of the underlying asset.

Value-at-Risk
A value-at-risk (VAR) model is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Unsystematic risk
Also called the diversifiable risk or residual risk. The risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.

Unique risk
Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated through diversification.

Systematic risk principle
Only the systematic portion of risk matters in large, well-diversified portfolios. The expected returns must be related only to systematic risks.

Sovereign risk
The risk that a central bank will impose foreign exchange regulations that will reduce or negate the value of FX contracts. Also refers to the risk of government default on a loan made to it or guaranteed by it.

Shortfall risk
The risk of falling short of any investment target.

Risk-free asset
An asset whose future return is known today with certainty.

Risk-adjusted return
Return earned on an asset normalized for the amount of risk associated with that asset.

Risky asset
An asset whose future return is uncertain.

Riskless arbitrage
The simultaneous purchase and sale of the same asset to yield a profit.

Risk premium approach
The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

Risk premium
The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.

Risk prone
Willing to pay money to transfer risk from others.

Risk neutral
Insensitive to risk.

Risk management
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Risk lover
A person willing to accept lower expected returns on prospects with higher amounts of risk.

Risk indexes
Categories of risk used to calculate fundamental beta, including (a) market variability, (b) earnings variability, (c) low valuation, (d) immaturity and smallness, (e) growth orientation, and (f) financial risk.

Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets.

Risk classes
Groups of projects that have approximately the same amount of risk.

Risk averse
A risk-averse investor is one who, when faced with two investments with the same expected return but two different risks, prefers the one with the lower risk.

Risk-adjusted profitability
A probability used to determine a "sure" expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.

Risk
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus exposed to the risk of falling rates.

Reinvestment risk
The risk that proceeds received in the future will have to be reinvested at a lower potential interest rate.

Regulatory pricing risk
Risk that arises when regulators restrict the premium rates that insurance companies can charge.

Product risk
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or inventory but does not have a sale commitment at a prearranged price.

Price risk
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the lender may have to sell his originated loans at a discount.

Political risk
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country.

Overnight delivery risk
A risk brought about because differences in time zones between settlement centers require that payment or delivery on one side of a transaction be made without knowing until the next day whether the funds have been received in an account on the other side. Particularly apparent where delivery takes place in Europe for payment in dollars in New York.

Operating risk
The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk.

Nonsystematic risk
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.

Nondiversifiable risk
Risk that cannot be eliminated by diversification.

Mortgage-pipeline risk
The risk associated with taking applications from prospective mortgage borrowers who may opt to decline to accept a quoted mortgage rate within a certain grace period.

Market risk
Risk that cannot be diversified away.

Market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The reward-to-risk ratio of the market portfolio.

Liquidity risk
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions.

Bankruptcy risk
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Basis risk
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.

Business risk
The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.

Call risk
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

Commercial risk
The risk that a foreign debtor will be unable to pay its debts because of business events, such as bankruptcy.

Completion risk
The risk that a project will not be brought into operation successfully.

Counterparty risk
The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed.

Country economic risk
Developments in a national economy that can affect the outcome of an international financial transaction.

Country financial risk
The ability of the national economy to generate enough foreign exchange to meet payments of interest and principal on its foreign debt.

Country risk
General level of political and economic uncertainty in a country affecting the value of loans or investments in that country.

Credit risk
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument.

Cross-border risk
Refers to the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent.

Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract embedded in the underlying transaction.

Risk-adjusted return on capital (RAROC)
Measures performance on a risk-adjusted basis. Calculated as the economic return divided by economic capital. RAROC helps determine if a company has the right balance between capital, returns and risk. The central concept in RAROC is economic capital: the amount of capital a company should put aside needed based on the risk it runs.

Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the expected return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional expected return needed to compensate for a unit change in risk. The equation of the CML is defined by the Capital Asset Pricing Model (CAPM).

Pin Risk
The uncertainty that an option position may be exercised into the underlying instrument. It is risky because it often refers to markets flirting with the prevailing at-the-money level. At such times, the gamma on a position is very erratic and difficult to hedge. Also, there are doubts about the exercise or assignment process. A trader can experience significant changes in net positions due to option exercises.

Risk Capital
Money put up by ordinary shareholders, an individual entrepreneur or venture capitalist that will be lost if the enterprise fails.