Bow Tie Loan

AAA

DEFINITION of 'Bow Tie Loan'

A short-term, variable-rate loan in which unpaid interest charges above a predetermined interest rate are deferred. A variable-rate loan is a loan in which the interest rate fluctuates in response to market interest rates. So, when bow tie loans are issued, a predetermined interest rate is set and whenever the market rate goes up past that rate, interest payments for investors are deferred until the end of the loan's maturity.

INVESTOPEDIA EXPLAINS 'Bow Tie Loan'

For example, let's say a company wants to take out a bow tie loan of $100,000, current interest rates are 15% and the lending company has set a limit interest rate of 22%. At 22%, the company is paying $22,000 in interest payments. In the event that interest rates rise above 22% to, say, 26%, the interest payments will rise from $22,000 to $26,000. In this case, the company is still liable for $22,000 of interest payments, but the difference of $4,000 ($26,000 - $22,000) is deferred until the loan's maturity date.

RELATED TERMS
  1. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  2. Loan

    The act of giving money, property or other material goods to ...
  3. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  4. Repayment

    The act of paying back money previously borrowed from a lender. ...
  5. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  6. Discounted Payoff

    The repayment of a loan in an amount that is less than the principal ...
Related Articles
  1. The Best Way To Borrow
    Retirement

    The Best Way To Borrow

  2. When is it a good idea to take out a ...
    Investing

    When is it a good idea to take out a ...

  3. Different Needs, Different Loans
    Options & Futures

    Different Needs, Different Loans

  4. Which is better, a fixed or variable ...
    Investing

    Which is better, a fixed or variable ...

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center