Notes on Interest Rates

In order to analyze the effects of changes in interest rates, let us have a very quick view of the types of interest rates: Simple Interest: The most easy and simple to use because it ignores the effects of compounding. It is the product of principal amount, the rate and the time period of amount borrowed for. Simple Interest = Principle * Rate * Time period Compound Interest: Unlike simple interest the principle changes with every time period. The new principal at the end of every time period is essentially the simple interest on the principal at the beginning of the time period, added to the principal. Real Interest: It is the growth rate of purchasing power derived from an investment. It only includes the systematic and regulatory risks. The real interest rate on short term loans is strongly influenced by the monetary policy of central banks. The real interest rate on longer term bonds tends to be more market driven, and in recent decades, with globalize financial markets; the real interest rates in the industrialized countries have become increasingly correlated. Nominal Interest: The interest rate unadjusted for inflation. It includes all the three risk factors, plus the time value for money. Discount rate: The rate that an eligible depository institution is charged to borrow short term funds directly from the central bank through the discount window. Also known as the primary rate, or base rate. Increasing the discount rate will ultimately cause interest rates to rise.

Call Money Rate Interbank clean (without collateral) lending/borrowing rates are called Call Money Rates.

The interest rate on a type of short-term loan that banks give to brokers who in turn lend the money to investors to fund margin accounts. For both brokers and investors, this type of loan does not have a set repayment schedule and must be repaid on demand.
Coupon Rate Coupon rate is interest rate payable on bonds par value at specific regular periods. In PIBs they are paid on biannual basis. Discount rate Discount is the rate at which SBP provides three-day repo facility to banks, acting as the lender of last resort.

1. The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank. Different types of loans are available from Federal Reserve Banks and each corresponding type of credit has its own discount rate. 2. The interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest) and the risk or uncertainty of the anticipated future cash flows (which might be less than expected).
KIBOR (Karachi Interbank Offered Rate) Interbank clean (without collateral) lending/borrowing rates quoted by the banks on Reuters are called Kibor Rates. The banks under this arrangement quote these rates at specified time i.e. 11.30 AM at Reuters. Currently 20 banks are member of Kibor club and by excluding 4 upper and 4 lower extremes, rates are averaged out that are quoted for both ends viz: offer as well bid. The tenors available in Kibor are one week to 3 years. KIBOR is used as a benchmark for corporate lending rates.

Definition of 'Required Rate Of Return - RRR'

The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The required rate of return (RRR) is used in both equity valuation and in corporate finance. Investors use the RRR to decide where to put their money. They compare the return of an investment to all other available options, taking the risk-free rate of return, inflation and liquidity into consideration in their calculation. For investors using the dividend discount model to pick stocks, the RRR affects the maximum price they are willing to pay for a stock.
In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one countrys currency in terms of another currency. For example, an interbank exchange rate of RS. 89.98 Pakistani rupee to the United States dollar (US$) means that RS. 89.98 will be exchanged for each US$1 or that US$1 will be exchanged for each RS. 89.98. Exchange rates are determined in the foreign exchange market.

Definition of 'Yield To Maturity - YTM'

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.

explains 'Yield To Maturity - YTM'

An approximate YTM can be found by using a bond yield table. However, because calculating a bond's YTM is complex and involves trial and error, it is usually done by using a programmable business calculator.

Interest spread refers to the difference in borrowing and lending rates of financial institutions (such as banks) in nominal terms. Net interest spread is expressed as interest yield on earning assets (any asset, such as a loan, that generates interest income) minus interest rates paid on borrowed funds.