Market Interest Rates

By: EconomyWatch Content   Date: 10 November 2009

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Market Interest Rates are specifically defined as the rates of interests paid on deposits and other investments determined by the interaction of supply and demand of funds in the money market. Interest rates, as a subject can get very complex and tricky sometimes, just add the volatility in money markets and stock exchanges worldwide. Most people pay serious attention to interest rates, as their present and future fortunes depend on it. Credit cards are an important mechanism where the concept of market interest rates is applied. Card users make their payments according to these rates. The users borrow money for the short-term, in order to buy something right away.

 

The interest rate that applies to investors is the US Federal Reserve's federal funds rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. This is also the Fed’s way of controlling inflation. Inflation is caused by too much demand for too little supply, which causes prices to increase. By influencing the amount of money available for purchasing goods, the Fed can control inflation. In other countries, central banks perform the same function for the same reasons.

Market Interest Rates: Mortgage Rates

In mortgage, interest rates can be broadly classified into two categories: fixed rates and adjustable rates.  In a Fixed Rate Mortgage (FRM), the interest rate remains constant throughout the tenure of the loan. On the other hand, in an Adjustable Rate Mortgage (ARM), the rate is dynamic and varies directly with one or more market indices.

 

There are several market indices. The index the mortgage lender follows is typically the index that influences the adjustable rate of mortgage. Some of the most common market indices used globally are:

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Cost of Funds Index (COFI)

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London Inter Banking Operating Rate (LIBOR)

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Constant Maturity Treasure (CMT)

 

For many investors, a declining market or stock price is not a desirable outcome. Investors wish to see their invested money increase in value. Such gains come from stock price appreciation, and the payment of dividends. When the Fed raises the federal funds rate, Treasury bills and bonds, are often viewed as the safest investments, and usually experience a corresponding increase in interest rates.

 

 

 


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