What is a 'Reference Rate'
An interest rate benchmark upon which a floatingrate security or interest rate swap is based. The reference rate will be a moving index such as LIBOR, the prime rate or the rate on benchmark U.S. Treasuries.
Depending on the security or financial contract being written, the reference rate can be more esoteric, in the form of an inflation benchmark (such as the Consumer Price Index) or a measure of economic health (such as unemployment rates or corporate default rates).
BREAKING DOWN 'Reference Rate'
Reference rates are at the core of an adjustable rate mortgage (ARM), where the borrower's interest rate will be the reference rate (usually LIBOR) plus a fixed amount, known as the spread. From the point of view of a lender, the reference rate is a guaranteed rate of borrowing, so at minimum the lender always earns the spread as profit.
If the reference rate makes a sudden move upward, borrowers who must pay floating interest rates will see their payments rise dramatically.
When used in an interest rate swap, the floating reference rate is exchanged by one party to the transaction for a fixed interest rate or set of payments.

LIBOR Flat
An interest rate benchmark used to establish the floating interest ... 
Variable Interest Rate
An interest rate on a loan or security that fluctuates over time, ... 
Interest Rate Index
An index that is based on the interest rate of a financial instrument ... 
Accrual Swap
A form of discrete timeswitch option in which the interest on ... 
Delayed Rate Setting Swap
An exchange of cash flows, one of which is based on a fixed interest ... 
Floating Interest Rate
An interest rate that is allowed to move up and down with the ...

Investing Basics
Managing Interest Rate Risk
Interest rate risk stems from the possibility that an interestbearing assetâ€™s value will change due to changing interest rates. 
Options & Futures
Managing Interest Rate Risk
Learn which tools you need to manage the risk that comes with changing rates. 
Professionals
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Investing
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Investing Basics
How Are Interest Rate Swaps Valued?
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Investing
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Home & Auto
AdjustableRate Mortgage Indexes: Know Your Benchmark
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Fundamental Analysis
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Credit & Loans
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How did the LIBOR scandal affect interest rate swaps?
Find out how the LIBOR scandal directly enriched some interest rate swap traders and harmed others by understating the real ... Read Answer >> 
What is an absolute rate?
An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >> 
Can individual investors profit from interest rate swaps?
Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >> 
How does LIBOR compare to the Federal Reserve rate as an accurate indicator?
Explore a comparison of the predictive efficacy of the Federal Reserve's fed funds rate and the Intercontinental Exchange's ... Read Answer >> 
What are interest rate swaps on the OTC market?
Learn about interest rate swaps and how they are traded over the counter, and understand the impact of DoddFrank on swaps ... Read Answer >> 
How can an investor reduce interest rate risk?
Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >>