Interest rate is one of the important economic indicators of a country. Almost in all the monetary transactions that take place in an economy, interest rates have a major influence. With the changing scenario of the financial markets across the world, interest rates have also come across innovations. Traditionally, only fixed rate of interest prevailed in the market, but now, floating rate of interest has also come up to serve as an alternative. Though floating rates provide an alternative to fixed rate, it does involve risk. Presently, floating rate loans and deposits have gained a lot of importance in almost all the financial sectors.
Sir! What is the difference between Fixed Rate and Floating Rate? Elementary! Mr. Watson. In respect of fixed rate contract the borrower and lender agree to a rate of interest, which will remain valid throughout the life of the contract. However, in respect of floating rate contract, the method of determining the rate will be agreed upon in the beginning and the rate will change accordingly. For a floating rate contract, the following are the prerequisites
Let me elaborate with an example. A lender may lend money at 8.50% for a housing loan for 20 years. Alternatively, he may lend money for 20 years at a floating rate, which on the date of lending may be 8.75%. However, in the later case, the terms would be specified as under.
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