Interest Rate Index

AAA

DEFINITION of 'Interest Rate Index'

An index that is based off the interest rate of a financial instrument or basket of financial instruments. An interest rate index serves as a benchmark used to calculate the interest rate charged on financial products, such as mortgages.

INVESTOPEDIA EXPLAINS 'Interest Rate Index'

Investors, borrowers and lenders use the index to determine the interest rates of the financial products they buy and sell.

The interest rate index can be based on changes to a single item, such as the yield on U.S. Treasury securities, or on a more complex series of rates. For example, an index may be based on the monthly weighted average cost of funds for banks within a state.

Many widely used financial products follow an interest rate index. An adjustable rate mortgage (ARM), for example, ties its interest rate to an underlying index. Well-known indexes include the London Interbank Offered Rate (LIBOR) and the Treasury Constant Maturities index.

RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. LIBOR Scandal

    A scandal in which financial institutions were accused of fixing ...
  3. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  4. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  5. Deficiency Balance

    The amount owed to a creditor if the sale proceeds from the collateral ...
  6. Processing Date

    The month, day and year when a merchant’s bank processes a credit ...
RELATED FAQS
  1. How do open market operations affect the money supply of an economy?

    The open market operations conducted by the Federal Reserve affect the money supply of an economy through the buying and ... Read Full Answer >>
  2. How have low interest rates affected the real estate sector?

    Low interest rates stimulate the real estate sector by encouraging home-buying activity and by making it less expensive for ... Read Full Answer >>
  3. What does the notional principal of a derivative contract refer to?

    The notional principal amount of a derivative refers to the nominal, or predetermined, value used to calculate payments made ... Read Full Answer >>
  4. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
  5. How can I calculate convexity in Excel?

    In the bond market, convexity refers to the relationship between price and yield; when graphed, this relationship in non-linear ... Read Full Answer >>
  6. How does duration impact bond funds?

    Duration measures the sensitivity of bond funds to changes in interest rates. A higher duration means that the fund has a ... Read Full Answer >>
Related Articles
  1. Investing Basics

    How Banks Set Interest Rates On Your Loans

    On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ...
  2. Economics

    What Is ICE LIBOR And What Is It Used For?

    In the case of ICE LIBOR, an innocent-sounding set of letters has a profound bearing on every loan you make.
  3. Investing Basics

    The Insiders Who Fix Rates for Gold, Currencies And Libor

    The system by which benchmark rates are fixed for interest rates, currencies and gold is archaic - and, many would argue, deeply flawed.
  4. Investing Basics

    The Interest Rates: APR, APY And EAR

    When most people shop for financial products, all they focus on is the listed interest rate. Human eyes instinctively dismiss the fine print, which usually includes the terms APR (annual percentage ...
  5. Personal Finance

    How Interest Rates Affect Property Values

    When interest rates fall, real estate prices tend to increase. Why? Find out here.
  6. Economics

    Understanding Interest Rates: Nominal, Real And Effective

    Interest rates can be broken down into several subcategories that incorporate various factors such as inflation. Smart investors know to look beyond the nominal or coupon rate of a bond or loan ...
  7. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  8. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  9. Investing

    What A Rate Hike May Mean For Stocks

    By the end of the year, investors will likely be contending with the first Federal Reserve (Fed) rate hike in nearly a decade.
  10. Professionals

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center