A variable rate refers to a variable rate that varies over the duration of the bond. This is the opposite of a fixed interest rate where the interest rate remains constant throughout the life of the debt. Loans, such as residential mortgages, Mortage-backed Security (MBS) A Mortgage-backed Security (MBS) is a mortgage-backed bond or a set of mortgages. An MBS is an asset-based security traded on the secondary market that allows investors to benefit from the mortgage activity, both at fixed rates and at variable rates, which periodically adapt to market conditions. Mortgages are not the only type of credit that can have variable interest rates. Most credit cards also have variable interest rates. As with mortgages, these interest rates are linked to an index. In most cases, the index is the current policy rate that directly reflects the interest rate set several times a year by the Federal Reserve. Most credit card agreements indicate that the interest rate charged to the borrower is the premium rate plus a certain range. Gain the confidence you need to access a successful career in corporate finance. Changes in interest rates using a variable rate loan are generally based on a benchmark interest rate or “benchmark” that is beyond the control of the parties to the contract. The benchmark interest rate is generally a recognized benchmark rate, such as the PrimePrime Rate The term “Prime Rate” (also known as prime lending rate) refers to the interest rate that large commercial banks delegate on the loans and products of their most rated customers.
, large corporations or wealthy individuals). A variable interest rate is an interest rate that moves up and down with the market or index. It can also be called a variable rate, as it may vary over the duration of the bond. This contrasts with a fixed interest rate where the interest rate on a debt commitment over the life of the loan remains constant. In many countries, variable rate loans and mortgages prevail. They can be referred to by different names, such as . B a variable rate mortgage in the United States. In some countries, there may not be a specific name for this type of loan or mortgage, as variable rate loans may be the norm.
In Canada, for example, all mortgages are essentially variable rate mortgages; Borrowers can “set” the interest rate for a period of between six months and ten years, although the actual term of the loan may be twenty-five years or more.