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INTEREST
Accrued interest
• Is the amount of interest which has accumulated since the last coupon interest
payment. It is the amount of interest which the holder is entitled but is not due until
the payment date. The buyer pays the seller of the bond the accrued interest.
• The accumulated coupon interest earned but not yet paid to the seller of a bond by
the buyer (unless the bond is in default).
• Interest due from issue or from the last coupon date to the present on an interest-
bearing security. The buyer of the security pays the quoted dollar price plus accrued
interest.
• Swap in which the principal or national amount rises (falls) as interest rates rise
(decline).
• 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 ).
Capitalized interest
• Interest that is not immediately expensed, but rather is considered as an asset and
is then amortized through the income statement over time.
Compound interest
Compounded interest
• Interest earned on a given deposit that has become part of the principal at the end
of a specified period.
• Abbreviated EBIT. A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and
non-operating profit before the deduction of interest and income taxes.
• An annual measure of the time value of money that fully reflects the effects of
compounding.
• The rate equal to the nominal rate plus (or minus) any forecast appreciation (or
depreciation) of a foreign currency relative to the currency of the MNC parent.
• The interest rate that clears the market. Also called the market-clearing interest
rate.
• The multiplier used to calculate at a specified interest rate, the future value of a
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Gross interest
Indication of interest
• Occurs when a client states his or her interest in purchasing a new issue before its
effective date. This interest is non-binding.
Interest
• The return paid on debt financing. Interest income is taxable in the hands of the
investor at their personal marginal tax rate. Interest expense is usually a tax-
deductible expense of the corporate borrower.
• The charge for the privilege of borrowing money, usually expressed as an annual
percentage rate.
• The price paid for borrowing money. It is expressed as a percentage rate over a
period of time and reflects the rate of exchange of present consumption for future
consumption. Also, a share or title in property.
• Are quite varied yet interrelated. Some of the standard computations are:
These formulae are predicated on calculating values basis 1 unit of currency. Here,
it is one dollar. To adjust for other amounts such as five hundred or one thousand
dollars then multiply the resulting factor by 500 or 1,000, respectively. By solving for
the appropriate factor based on 1.0000 simplifies the analysis and verification
process.
Amount = (1 + interest rate)t where i is the interest rate and t is expressed decimally
(.05 for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2 equals 2 years
and 7.75 equals 7 3/4 years.
Amount = eit where e is equal to 2.7183, i is the interest rate and t is expressed
decimally (.05 for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2
equals 2 years and 7.75 equals 7 3/4 years.
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Interest coverage
• The number of times all interest charges are earned by pre-tax, pre-interest
earnings, typically at least 3 times. The formula is the Interest expense plus pre-tax
income , and divide this sum by the interest expense.
• The ratio of the earnings before interest and taxes to the annual interest expense.
This ratio measures a firm's ability to pay interest.
• A debt limitation that prohibits the issuance of additional long-term debt if the
issuer's interest coverage would, as a result of the issue, fall below some specified
minimum.
Amount = (1 + interest rate)-t or, Amount = __1___ (1 + i)t where i is the interest rate
and t is expressed decimally (.05 for 5 percent). Also, t is the time and .5 refers to
1/2 of a year, 2 equals 2 years and 7.75 equals 7 3/4 years.
Amount = e-it where e is equal to 2.7183, i is the interest rate and t is expressed
decimally (.05 for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2
equals 2 years and 7.75 equals 7 3/4 years.
• Tax on foreign investment by residents of the U.S. which was abolished in 1974.
• A tax-related adjustment that must be made that allows the before-tax dividend
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Amount = [(1+i)t-1]/i where i is the interest rate and t is expressed decimally (.05 for
5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2 equals 2 years and
7.75 equals 7 3/4 years.
Amount = 1 -[1/(1+i)t] i where i is the interest rate and t is expressed decimally (.05
for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2 equals 2 years and
7.75 equals 7 3/4 years.
Amount = ___i___ z(1+i)t-1 where i is the interest rate and t is expressed decimally
(.05 for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2 equals 2 years
and 7.75 equals 7 3/4 years.
Interest on interest
Interest only
• Abbreviated IO. A security based solely on the interest payments form a pool of
mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or
bonds has been repaid, interest payments stop and the value of the IO falls to zero.
• Contractual debt payments based on the coupon rate of interest and the principal
amount.
Interest rate
• The cost of money. The greater the risk of the debt security, the higher the interest
rate lenders will require. The compensation paid by the borrower of funds to the
lender; from the borrower's point of view, the cost of borrowing funds.
• This is the cost of borrowing. If the interest rate is 10% and you borrow $1,000,
then $100 must be paid as interest payments at the end of each year.
• Also called an interest rate ceiling, an interest rate agreement in which payments
are made when the reference rate exceeds the strike rate.
• An interest rate agreement in which payments are made when the reference rate
falls below the strike rate.
• Interest rate differential between two countries is equal to the difference between
the forward foreign exchange rate and the spot rate.
• The chance that interest rates will change and thereby change the required return
and bond value. Rising rates, which result in decreasing bond values, are of greatest
concern.
• The risk of changes in value due to changes in interest rate is called interest rate
risk. Long lived assets lose more of their value when interest rates rise than short
lived assets. If a bank has more long-lived assets than liabilities, then the bank
worries about interest rate increases.
• Is the risk associated with changes in general interest rate levels or yield curves.
This compares to Prepayment Risk.
• If a bank expects a rise in interest rates, it increases the maturity of its liabilities
and decreases the maturity of its assets. If a bank expects the interest rates to
remain the same or decline, it holds more long term assets than liabilities.
• The buyer of the swap agrees to make a number of fixed interest rate payments
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periodically to the seller on some agreed upon notational amount. In return, the
seller agrees to make floating rate interest payment on the same dates to the buyer
on the same notational amount.
• Is the contract whereby one party typically agrees to exchange a floating rate for a
fixed coupon rate. There are many variations to this theme. Some of these other
Interest subsidy
• A firm's deduction of the interest payments on its debt from its earnings before it
calculates its tax bill under current tax law.
• The reduction in income taxes that results from the tax-deductibility of interest
payments.
Minority interest
• A ratio used for evaluating management for bank stocks. Measures the difference
between interest paid and interest collected.
• Is the difference between the interest revenue and the interest expense.
Sometimes, it is referred to as the spread.
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• The stated interest rate charged on financing when only the MNC parent's currency
is involved.
• The actual rate of interest charged by the supplier of funds and paid by the
Open interest
• The total number of derivative contracts traded that not yet been liquidated either
by an offsetting derivative transaction or by delivery. Related: liquidation
• Is the amount of open contracts for the futures and options markets. This amount
can fluctuate throughout the day and day-by-day. It represents the quantity of
contracts which are subject to offset by either liquidation of long positions, covering
of short positions or making and taking delivery. Sometimes referred to as
commitment or open commitment.
Pooling of interests
• The multiplier used to calculate at a specified discount rate the present value of an
amount to be received in a future period.
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Rate of interest
• The real interest rate is the interest rate that would prevail in an economy with no
• 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.
• The rate that creates an equilibrium between the supply of savings and the
demand for investment funds in a perfect world, without inflation, where funds
suppliers and demanders have no liquidity preference and all outcomes are certain.
Short interest
• The total number of shares of a security that have been sold short by customers
and securities firms. See also: Short Selling.
• This is the total number of shares of a security that investors have borrowed, then
sold in the hope that the security will fall in value. An investor then buys back the
shares and pockets the difference as profit.
Simple interest
• Interest rate fixed today on a loan that is made today. Related: forward interest
rates.
• The interest rate expressed as a per annum percentage, by which interest payment
is determined.
• The relationship between the interest rate or rate of return (as measured by the
yield to maturity on a bond) and the time to maturity for similar risk debt securities.
• Refers to the variability of short-term rates relative to longer-term rates. It has been
documented that short-term rates exhibit greater variability or volatility than long-
term rates. However, longer-term instruments experience greater price sensitivity
than short-term instruments for a given change in the underlying rate. A quick
measure of this price sensitivity is provided by duration. Typically, debt instruments
without option features, explicit or implicit, have greater duration with longer
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maturities. Zero coupon securities tend to have the greater price sensitivity relative
to coupon paying securities. See Duration.
• Times Interest Covered refers to the earnings before interest and taxes (EBIT)
divided by the interest payments. Higher interest coverage makes the firm less risky.
• For a security such as commercial paper that is sold on a discount basis, the
coupon rate required to provide an identical return assuming a coupon-bearing
instrument of like maturity that pays interest in arrears.