Posted in Finance, Accounting and Economics Terms, Total Reads: 278
Definition: Fixed Interest Rate
Fixed Interest rate is the interest rate paid on a liability such as bank loans, home loans, bonds, etc. that remains fixed over the entire term of the loan or over a part of it. Fixed rates are preferred by a borrower who expects the interest rates to rise in the future thus increasing its financial expenses. A fixed rate payer thus hedges itself from the interest rate risk that a floating rate payer faces. Floating rate payer pays interest rates based on a benchmark, like 6-months LIBOR, or on index, thus is exposed to interest rate risk.
Borrowers usually prefer fixed interest rates over floating rates as profits due to upward movement of interest rates usually outperform the losses due to downward movement of benchmark.
However, rules for Fixed and floating interest rate payments vary across countries as a home buyer in the United States can obtain a mortgage with fixed interest rate for the full term of the loan while a borrower in Canada can only have a fixed rate for a period of five to seven years of the term of the loan.