3 - Simple Loans and Deposits Flashcards
What is the bid/offer Spread?
The difference between the interest rate at which a bank will lend money and the interest rate at which the bank will pay for money on deposit. A low bid/offer spread indicates a competitive market and are used in all financial instruments. (Sometimes referred to as basis Points)
Explain some widely accepted conventions for Sterling loans and deposits…
- Quoted using simple interest (i.e. no compounding)
- Calendars on ACT/365 Basis
- Uses modified following day convention
- Settlement lag is zero
Explain some widely accepted conventions for Euro loans and deposits…
- Quoted using simple interest (i.e. no compounding)
- Calendars on ACT/360 Basis
- Uses modified following day convention
- Settlement lag 2 days
What is the Calculation to Determine Interest paid on a simple loan?
Loan Amount * Rate * (Loan length) = Interest Paid
i.e. £50mil | 4.59% | R | 1 day | Act/365
£50,000,000 * 0.0459 * (1/365) =£6,287.67
i.e. €50mil | 5.15% | R | 1 Month | Act/360
€50,000,000 * 0.0515 * (31/365) =€221,736.11
Explain the concept of Libor?
LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world.
What is a fixed rate loan/deposit?
These are loans/deposits where the interest is paid periodically. The interest calculation and settlement amounts are calculated according to the day count conventions, payroll conventions and holiday calendars. All interest ref periods are contiguous.
What are floating rate loans/deposits?
In floating rate loans/deposits, the interest rate charged is not known in advance and is reset generally at known dates. I.e. interest only mortgages.
What are Interest and repayment loans/deposits?
In Interest and repayment loans/deposits the periodic interest repayments are supplemented by principal repayments. Thus the amount of outstanding principal falls over the course of the loan.
