Tag Archives | interest rate

Prime Lending Rate

See Also:
Interest Expense
Interest Rate Swaps
LIBOR
Federal Funds Rate
Market Rate

Prime Lending Rate Definition

Prime rate, or prime lending rate, is the interest rate commercial banks charge on loans to preferred borrowers. The prime interest rate is lower than the interest rates charged to less creditworthy borrowers. Commercial banks can charge lower rates to preferred (prime) borrowers – usually corporate customers – because these borrowers are less likely to default and the loans are considered safer. The US Prime Rate dates back to 1929.

The US Prime Rate is derived from the federal funds rate, which is set by the Federal Reserve Bank. The prime lending rate is usually set 300 basis points above the federal funds rate. For example, if the federal funds rate is 2%, the prime interest rate would be 5%. The prime rate is typically uniform across the commercial banking industry, but some banks may charge their best customers more or less than the official prime lending rate.

The prime interest rate is also used as a reference point for other interest rates. Less creditworthy customers can borrow at a rate equal to the prime rate plus a certain number of percentage points, depending on the borrower’s creditworthiness. Several types of consumer loans, such as home equity, car, mortgage, and credit card loans are often linked to the prime interest rate. This rate is also considered a lagging economic indicator.

Wall Street Journal Prime Rate

The US Prime Rate is published in the Wall Street Journal, and is therefore often referred to as the Wall Street Journal Prime Rate, WSJ Prime Rate, or the WSJ Prime Lending Rate.

According to the Wall Street Journal, the prime rate is “the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks.” The Wall Street Journal only changes their published Prime Lending Rate when 23 out of 30 of the largest banks in the US change their prime interest rates.

Prime Rate History WSJ

For the Wall Street Journal Prime Lending Rate history, go to: wsjprimerate.us

Current Prime Rate

To see this rate today, as well as other rates, go to: bloomberg.com

Historical Data

For the history of prime interest rates, go to: research.stlouisfed.org.

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Prime Lending Rate, Prime Rate

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Prime Lending Rate, Prime Rate

 

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Par Value of Bonds

Par Value of Bonds Definition

The par value of bonds definition refers to the principal – the amount of money the bondholder receives when the bond matures. Par value is also called face value or nominal value. It is the amount stipulated in the bond contract. However, par value does not include interest payments. Bond interest rates are quoted as a percentage of the par value of the bond. While bond prices can fluctuate, the bond always matures at par value. However, if the bond issuer defaults, the bondholder may only receive a portion of the par value or nothing at all.

A bond priced above par value is selling at a premium and a bond priced below par value is selling at a discount.

Par values for corporate bonds, municipal bonds, and federal government bonds are usually $1,000, $5,000, and $10,000, respectively.

Bond Face Value

The face value of a bond is the same as the par value of a bond. It is the principal amount.

Nominal Value, Bond

The nominal value of a bond is the same as the par value of a bond. It is the principal amount.

Par Value of Bonds

See Also:
Common Stock
Company Valuation
Convertible Debt Instrument
Coupon Rate Bond
Covenant Definition of a Bond Contract
Fixed Income Securities
Long Term Debt
Maturity Date
Non-Investment Grade Bonds
Owner’s Equity
Preferred Stocks

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Monetize

See Also:
Current Assets
External Sources of Cash
Fixed Assets
Cash is in Your Business
Track Money In and Out of a Company

Monetize Definition

Monetizing is the act of converting an item into cash usually a bank note or some other certificate that is readily convertible at a bank into cash. However, there are also projects that can be monetized. That may include a website or maybe a book that an author is working on.

Monetize Meaning

Monetization means that a person is converting something into cash. Monetization methods could simply be a television that is sold at a pawn store to a debt instrument sold in the market. Regardless of what the convertible is, the final part of the process is a conversion whereby the final product is either legal tender or cash. Monetization often occurs with governments where the government will issue treasury securities in exchange for cash. Corporations will also use this type of monetization financing to support their operations.

Monetize Example

For example, Jim is currently working on monetizing a website that he created and worked on for over a year. He has finally reached the desired amount of traffic on the website, and has begun to implement his monetization strategies. As soon as the website starts making money for Jim monetization has officially started. Although it may be unclear for something like a website to readily value the amount of cash that will be received via the website. A debt instrument is much more liquid. It can be readily valued according to its interest rate and principal price. Likewise, you can readily value a treasury security. Therefore the act of monetization can occur overtime rather than the immediate returns by liquidating a television or a debt instrument.

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Monetize
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Monetize

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Mezzanine Debt Financing (Mezzanine Loans)

See Also:
Recapitalizing Your Company Using Mezzanine Financing
Angel Investor
Venture Capitalist
Why Venture Capital
What is a Term Sheet

What is Mezzanine Debt Financing (Mezzanine Loans)?

Mezzanine debt financing is a subordinated and unsecured loan which typically features a warrant. This type of debt has higher interest rates because of its subordinated and unsecured status. It is not backed by collateral. In the event of debtor default, the claims of mezzanine lenders are senior only to the claims of common shareholders. Therefore, use mezzanine debt to finance startup companies with growth potential or to complement other forms of debt in a leveraged buyout.

Like other debt instruments, mezzanine debt includes a contract that stipulates the details of the loan. The contract describes the amount of the loan, the rate of interest and the interest payment schedule, the due date for principal repayment, and whether or not there is a conversion feature. The loan may also allow a portion of the interest payments to be accrued over the life of the loan and paid along with the principal at maturity. This feature is payment-in-kind.

Interest rates on mezzanine loans are substantially higher than other types of loans. This is to compensate the lender for the riskiness of making a subordinated and unsecured loan.


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Mezzanine Lender

Mezzanine lenders are often private equity funds or venture capitalists. Therefore, consider these mezzanine loans speculative investments. The debt instrument provides a stream of income and some downside protection, while the warrant feature offers the potential for upside gains.

Advantages and Disadvantages of Mezzanine Debt Financing

For borrowers, mezzanine debt financing allows companies with less collateral to secure funding for growth. On the other hand, the interest rates on this type of loan are comparatively high. So it is expensive source of capital.

For lenders, mezzanine debt instruments offer higher yields than secured or more senior forms of debt. Also, the warrant feature offers the promise of gains if the borrowing company’s equity increases in value in the future. On the other hand, there is a greater risk of default because the claims are subordinate and unsecured.

Mezzanine Capital

Mezzanine capital refers to subordinated and unsecured debt or preferred equity. It often includes a warrant, or a conversion feature, that allows the lender or investor to convert the debt or preferred stock into a specified quantity of the company’s common stock at a set price within a stated period of time.

Equity Warrants

The equity warrant feature of mezzanine capital allows the lender or investor to convert the loan or preferred stock into a specified quantity of the company’s common stock at a set price within a stated period of time. Design it to give the lender or investor an equity stake in the possible future success of the company.

Mezzanine Meaning

The word “mezzanine” derives from the Italian diminutive form of the word “middle.” Use it to describe the lowest balcony in a theater.

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Mezzanine Debt Financing, mezzanine loans
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Mezzanine Debt Financing, mezzanine loans

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Nominal Interest Rate Definition

See Also:
What is Compound Interest
Effective Rate of Interest Calculation
Interest Expense
When is Interest Rate Not as Important in Selecting a Loan?
Interest Rate Swaps

Nominal Interest Rate Definition

A nominal interest rate is the interest rate rate quoted on lending and borrowing transactions. Nominal rates represent the rate of exchange between current and future dollars, unadjusted for the effects of inflation. Since nominal rates are not adjusted for inflation, they do not convey the prices of lending and borrowing transactions as accurately as real interest rates.

Nominal Interest Rate, Real Interest Rate

Nominal interest rates are not adjusted for inflation. Whereas, real interest rates are adjusted for inflation. Make the adjustment with current or projected inflation rates. Furthermore, real interest rates offer a more accurate representation of the prices of lending and borrowing transactions. To calculate real interest rates, use the following formula:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

For example, if a lender offers a loan with a nominal rate of 5% and the inflation rate is 3%, then the lender will earn real interest of 2%. However, if the inflation rate is 7%, then the lender will essentially be losing value on the loan.

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Nominal Interest Rate Definition

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Nominal Interest Rate Definition

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Market Rate

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.

Market Rate definition

See Also:
Delivery Order
Financing Lease
Lower of Cost or Market (LCM)
Excess Insurance Wiki

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Nominal Interest Rate

See Also:
What is Compound Interest
Effective Rate of Interest Calculation
Interest Expense
When is Interest Rate Not as Important in Selecting a Loan?
Interest Rate Swaps

Nominal Interest Rate Definition

A nominal interest rate is the interest rate rate quoted on lending and borrowing transactions. Nominal rates represent the rate of exchange between current and future dollars. It is unadjusted for the effects of inflation. Since nominal rates are not adjusted for inflation, they do not convey the prices of lending and borrowing transactions as accurately as real interest rates. In comparison, real interest rates are adjusted for inflation.

Nominal Interest Rate, Real Interest Rate

Nominal interest rates are not adjusted for inflation. Adjust real interest rates for inflation. Make the adjustment with current or projected inflation rates. Furthermore, real interest rates offer a more accurate representation of the prices of lending and borrowing transactions. Use the following formula to calculate real interest rates:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

For example, if a lender offers a loan with a nominal rate of 5% and the inflation rate is 3%, then the lender will earn real interest of 2%. If, however, the inflation rate is 7%, then the lender will essentially be losing value on the loan.

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Nominal Interest Rate

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Nominal Interest Rate

 

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