Market Rate Definition
The market rate, defined as the rate of interest, on a loan or investment, which is commonly available on the market for that product, defined the cost of benefit of the tool. For a loan, the market rate is the average rate of interest that will be charged to the receiver from a variety of providers. To the investor, the market rate is the average rate of interest gained from all or a certain set of investment vehicles which are available on the open market. These create the market rate of interest definition as a whole.
Market Rate Explanation
Market rate, explained as the rate to expect when seeking out an interest bearing tool, is the estimated average of all of the vehicles available. This, as listed above, can be applied to both loan and investment instruments. The market rate of return definition should be understood before the search begins.
Better than or worse than market rates are available. These, however, are the statistical anomaly. Market rate is what should be expected. When a party finds a more favorable rate it should first check other factors. If these do not decrease the benefit of use, the tool with the more favorable rate should be used. This requires market rate analysis to check the validity of each deal.
Market Rate Example
For example, Dwight will soon be receiving 2 market rates: the market rate on a loan for his business and the market rate for his investments. Dwight pays close attention to the market rate of return because he can create an expectation of both cost and benefit from it. He thinks his actions through.
First, Dwight looks for the market rate of loans. Soon after this research, Dwight finds a lender who is asking for less than the market rate. His research has paid off and he takes the loan.
Next, Dwight looks at the market rate vs coupon rate for a bond he may purchase. In this comparison, he evaluates the market rate of return on stock he may purchase. Deciding that more stock is too risky, Dwight relies on his research and opts to buy the bond. He appreciates diversification over the highest interest rate.
Dwight also looks at the market rate of return cash balance he has gained from employee benefits he used to receive. He is happy to receive that he is running average. This tool will be useful for his retirement planning.
Dwight relies on his research. Rather than assuming, he lets the market and his sense of judgement decide for him. Dwight has been a success so far and it seems he will continue to be one.
See Also:
Delivery Order
Financing Lease
Lower of Cost or Market (LCM)
Excess Insurance Wiki
