Do you ever wonder how your credit card rate is calculated when you apply for a loan or credit card? To better understand the workings of borrowing on loans and credit, it is best to know how to factor interest rates into the equation.
Interest rates are also used to determine the rate of return on investments. In other words, the pay-off when your Certificate of Deposit(CD) or Treasury Bill matures depends on interest. Both CDs and Treasury bills are sound investments that can compliment your regular savings account.
Understanding the Basics:
Bank Prime Loan: The Bank Prime rate is published by the Federal Reserve each week. This figure is one of several used by a majority of the 25 largest U.S.-chartered commercial banks to set interest rates on short-term business loans. Setting the interest rate is also known as ‘pricing’.
Certificate of Deposit: A certificate of deposit, termed CD for short, is a promissory note issued by a bank. The note promises interest to the holder at a time of maturity. Maturity dates range from one month to five years, typically. At maturity, the accrued interest issued to the holder is determined by the CD rate on the note at initial time of purchase. In example, a holder of a $1,000 6-month CD, at 3% interest is entitled to $1,015 at maturity. Interest rates are most often set as an Annual Percentage Yield with a compounding frequency. Usually, banks will require an initial deposit for a CD, and there are several banks that require no less than $1000. Also, CD holders often cannot touch the principle amount without incurring a penalty.
Treasury Bills: A Treasury Bill, also called a T-bill, is a short-term debt obligation backed by the U.S. government that matures in a year or less. Often, the maturity date will be four weeks, 13 weeks (three months), or 26 weeks (six months). Interest is paid at maturity, and the Treasury Bills are often sold at a discount to create a positive yield. The actual value of the T-bill is called par value, and the purchase price given at a discount from this.
Below is a round-up of this week’s interest rates published by the Federal Reserve.
News This Week in Rates:
Reuters reports Wednesday that the six major U.S.-based lenders released data showing the percentage of U.S. consumer credit delinquencies stabilized last month. These six major lenders included American Express, Bank of America Corp., Capital One, Citigroup, Discover, and JPMorgan Chase. A credit delinquency refers to a loan or lease, accruing interest or in non-accrual status that has been past due for thirty days or more. The report suggests that more Americans are paying off their credit cards on time, compared to a month ago. If this trend continues, expect other indicators of a rebounding economy to follow.
Treasury securities are changing hands among major foreign holders. According to the latest figures from the Federal Reserve, Japan has bumped China down to second in rank as the country increased its holdings of Treasury securities to $768.8 billion. Japan’s holdings took a $11.5 billion jump from $757.3 billion in November of 2009. China’s stake in U.S. Treasury bills decreased to $755.4 billion from $789.6 billion in November. Concerns have been raised about the effect of long-term declines in foreign purchases of Treasury bills. Without foreign holdings of this U.S. debt, interest rates may be driven upward for individuals and businesses.
Update: Thursday, the Federal Reserve Board announced it will raise its discount rate, also known as the primary credit rate, to 0.75% from 0.50%. Also announced, effective March 18 the typical maximum maturity for primary credit loans will be changed to overnight. The previous rates were set in place by the Fed in response to the economic downturn, but amid signs of recovery these rates are now being changed.
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