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Types of interest rates


  • Interest rate is the amount of money a borrower promises to pay to the lender over and above the principal amount
    • Treasury Rates: This is the rate an investor receives when he invests in Treasury bills and Treasury bonds. Treasury bills are short term while Treasury bonds are longer term (> 1 year)
    • Corporate bond rates: These are rates on long term bonds issued by a corporate
    • LIBOR: This is the London Interbank Offer Rate (LIBOR) and the rate at which banks make a large wholesale deposit or loan with/to another bank
      • 1 month, 3 months 6 months and 12 month LIBORs
      • Opportunity cost for AA rated banks
      • Not entirely risk free
    • Repo rates and Reverse Repo: Repo rate is the rate at which banks borrow money from the central bank. Reverse Repo rate is the rate at which the central bank borrows money from banks
    • A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest
    • A repo is equivalent to a cash transaction combined with a forward contract

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