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Leading
Indexes Definitions
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Term:
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11th
District Cost of Funds
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What
it means:
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A monthly cost-of-funds index (COFI) reflecting the
weighted-average interest rate paid by 11th
Federal Home Loan Bank District savings institutions for
savings and checking accounts. The 11th
district covers Arizona, California and Nevada. The
index is published on the last day of the month and
reflects the cost of funds for the prior month.
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How
it's used:
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It’s an index that is used to set the cost of
variable-rate loans, such as an adjustable-rate
mortgage. Lenders use such an index, which varies, to
adjust interest rates as economic conditions change.
They then add a certain number of percentage points
called a margin, which doesn’t vary, to the index to
establish the interest rate you must pay. When this
index goes up, interest rates on any loans tied to it
also go up. COFI usually lags market interest rates in
both up and down markets. That means loans tied to this
index rise and fall more slowly than rates in general.
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Term:
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One
Year MTA
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What
it means:
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This index is an average of the monthly one-year treasury
adjusted to constant maturity for the past 12 months.
Yields on Treasury securities at constant maturity are
determined by the U.S. Treasury from the daily yield
curve. That is based on the closing market-bid yields on
actively traded Treasury securities in the
over-the-counter market.
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How
it's used:
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It's an index that is used to set the cost of
variable-rate loans, particularly adjustable-rate
mortgages (ARMs). Lenders use such an index, which
varies, to adjust interest rates as economic conditions
change. They then add a certain number of percentage
points called a margin, which doesn't vary, to the index
to establish the interest rate you must pay. When this
index goes up, interest rates on any loans tied to it
also go up. Since this index is an annual average of the
monthly one-year CMT yield, it is less volatile than
other indexes that are not smoothed out over such an
extended period of time, such as the monthly one-year
CMT.
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Term:
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WSJ
Prime Rate
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What
it means:
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The initials stand for the Wall Street Journal, which
surveys large banks and publishes the consensus prime
rate. The Journal surveys the 30 largest banks, and when
three-quarters of them (23) change, the Journal changes
its rate, effective on the day the Journal publishes the
new rate. It's the most widely quoted measure of the
prime rate, which is the rate at which banks will lend
money to their most-favored customers.
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How
it's used:
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The prime rate is an important index used by banks to set
rates on many consumer loan products, such as credit
cards or auto loans. If you see that the prime rate has
gone up, your variable credit card rate will soon
follow.
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Term:
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1
Month LIBOR Rate
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What
it means:
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LIBOR stands for London Inter Bank Offer Rate. It's the
rate of interest at which banks offer to lend money to
one another in the wholesale money markets in London. It
is a standard financial index used in U.S. capital
markets and can be found in the Wall Street Journal. In
general, its changes have been smaller than changes in
the prime rate.
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How
it's used:
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It's an index that is used to set the cost of various
variable-rate loans. Lenders use such an index, which
varies, to adjust interest rates as economic conditions
change. They then add a certain number of percentage
points called a margin, which doesn't vary, to the index
to establish the interest rate you must pay. When this
index goes up, interest rates on any loans tied to it
also go up. Although it is increasingly used for
consumer loans, it has traditionally been a reference
figure for corporate financial transactions.
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Term:
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6
Month LIBOR Rate
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What
it means:
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LIBOR stands for London Inter Bank Offer Rate. It's the
rate of interest at which banks offer to lend money to
one another in the wholesale money markets in London. It
is a standard financial index used in U.S. capital
markets and can be found in the Wall Street Journal. In
general, its changes have been smaller than changes in
the prime rate.
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How
it's used:
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It's an index that is used to set the cost of various
variable-rate loans. Lenders use such an index, which
varies, to adjust interest rates as economic conditions
change. They then add a certain number of percentage
points called a margin, which doesn't vary, to the index
to establish the interest rate you must pay. When this
index goes up, interest rates on any loans tied to it
also go up. Although it is increasingly used for
consumer loans, it has traditionally been a reference
figure for corporate financial transactions.
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Term:
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1
Year LIBOR Rate
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What
it means:
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LIBOR stands for London Inter Bank Offer Rate. It's the
rate of interest at which banks offer to lend money to
one another in the wholesale money markets in London. It
is a standard financial index used in U.S. capital
markets and can be found in the Wall Street Journal. In
general, its changes have been smaller than changes in
the prime rate.
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How
it's used:
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It's an index that is used to set the cost of various
variable-rate loans. Lenders use such an index, which
varies, to adjust interest rates as economic conditions
change. They then add a certain number of percentage
points called a margin, which doesn't vary, to the index
to establish the interest rate you must pay. When this
index goes up, interest rates on any loans tied to it
also go up. Although it is increasingly used for
consumer loans, it has traditionally been a reference
figure for corporate financial transactions.
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Term:
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Federal
Funds Rate
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What
it means:
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The interest rate at which banks
and other depository institutions lend money to each
other, usually on an overnight basis. The law requires
banks to keep a certain percentage of their customer's
money on reserve, where the banks earn no interest on
it. Consequently, banks try to stay as close to the
reserve limit as possible without going under it,
lending money back and forth to maintain the proper
level.
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How
it's used:
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Like the federal discount rate, the
federal funds rate is used to control the supply of
available funds and hence, inflation and other interest
rates. Raising the rate makes it more expensive to
borrow. That lowers the supply of available money, which
increases the short-term interest rates and helps keep
inflation in check. Lowering the rate has the opposite
effect, bringing short-term interest rates down.
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Term:
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Federal
Discount Rate
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What
it means:
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The interest rate at which an
eligible financial institution may borrow funds directly
from a Federal Reserve bank. Banks whose reserves dip
below the reserve requirement set by the Federal
Reserve's board of governors use that money to correct
their shortage. The board of directors of each reserve
bank sets the discount rate every 14 days. It's
considered the last resort for banks, which usually
borrow from each other.
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How
it's used:
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The Fed uses the discount rate to
control the supply of available funds, which in turn
influences inflation and overall interest rates. The
more money available, the more likely inflation will
occur. Raising the rate makes it more expensive to
borrow from the Fed. That lowers the supply of available
money, which increases the short-term interest rates.
Lowering the rate has the opposite effect, bringing
short-term interest rates down.
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