Documente Academic
Documente Profesional
Documente Cultură
A floating interest rate is an interest rate that moves up and down with the rest of the
market or along with an index. It can also be referred to as a variable interest
rate because it can vary over the duration of the debt obligation. This contrasts with
a fixed interest rate, in which the interest rate of a debt obligation stays constant for
the duration of the loan's term.
the Federal Reserve several times per year. Most credit card agreements
state that the interest rate charged to the borrower is the prime rate plus
a certain spread.
While fixed interest rates stay fixed or set, variable interest rates vary or
adjust. For example, if a borrower takes out an adjustable rate mortgage
(ARM), he typically receives an introductory rate for a set period of time,
often for one, three or five years. After that point, the rate adjusts on a
periodic basis, as outlined in the mortgage agreement.
To illustrate, imagine the bank gives the borrower a 3.5% introductory rate
on a $300,000 30-year mortgage with a 5/1 ARM. During the first five years
of the loan his monthly payments are $1,347. However, when the rate
adjusts, it increases or decreases based on the interest rate set by the
Federal Reserve or another benchmark index. If the rate adjusts to 6%, for
example, the borrower's payments increase to $1,799. In contrast, if the
rate falls to 3%, the monthly payments fall to $1,265. Conversely, if the
3.5% rate is fixed, the borrower faces the exact same $1,347 payment
every month for 30 years.
Getting a home loan is very easy now a days, however choosing the best option
is always a complex aspect. One should do a proper homework before rushing in
to something. While applying for a home loan, the first thing which will bother the
applicants is whether to go for Fixed Interest rate or Floating Interest rates?
Let us see which option is better.
Fixed Interest Rate on Home Loan
Fixed Interest Rate means repayment of home loans in Fixed Equal Installments
over the entire period of loan. In this case the interest rate doesnt change with
Market fluctuations. During the early part of loan tenure the majority of monthly
payments are used to service the interest and principal is served in the later parts
of loan tenure.
Benefits of Fixed Rate home loan
A fixed rate home loan is excellent for those who are good at
budgeting and want a fixed monthly repayment schedule, which
is easy to budget and doesn't fluctuate.
varies.
Benefits of Floating Interest rate on Home loan
The biggest benefit with floating rate home loans is that they are
at least 1%-2% cheaper than fixed interest rates. So, if you are
getting a floating interest rate of 11.5% while, the fixed loan is
being offered at 14%, you still save money if the floating interest
rate rises by up to 2.5%.
Even if the floating rate goes over the fixed rate, it will be for
some period of the loan not for the entire tenure. The interest
rates will surely fall over a long period and thus floating interest
rate brings a lot of savings.
If you go with the floating interest rate then the EMI will come to around Rs.
23,712, whereas the EMI under the Fixed Interest rate option will be Rs. 26,660.
So, monthly you end up saving around Rs. 2948.Though this amount look small,
it will make a big difference in the Long Term. However, you will benefit choosing
a floating rate home loan as long as the interests do not go beyond 11.5%.
Conclusion
When it comes choosing the interest rate, majority of home loan borrowers, in
fact over 90% of them go for a floating interest rate home loan. Finally, it is up to
the borrower to decide on what suits him the best. Before taking a decision, it is
advisable for the borrower to compare home loans from different institutions in
detail including the various parameters set forth. If certainty and security are
prime considerations, a fixed rate home loan will be the best, however it won't
come without the premium on interest rates.
Published Dec 15 2011
Interest Rates
Expand AllClose All
Savings Account
SAVINGS BANK ACCOUNT
RATE OF INTEREST#
SENIOR
NORMAL
CITIZEN
MINIMUM BALANCE*
Domestic#
a. With cheque book facility
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
Non Resident
NRO / NRE
# Interest Rate revised from 3.50% p.a to 4.00% p.a w.e.f. May 3, 2011
30 days to 45 days
46 days to 60 days
61 days to 90 days
91 days to 120 days
121 days to 184 days
185 days to 289 days
290 days to less than 1 year
1 year to 389 days
390 days to 5 years
5 years 1 day upto 10 years
5 Years Tax saver FD(Max upto Rs. 1.50 lac)
5.50
6.25
6.25
6.50
6.75
6.75
7.00
7.25
7.25
7.25
7.25
6.00
6.75
6.75
7.00
7.25
7.25
7.50
7.75
7.75
7.75
7.75
Note
As interest rates are subject to change without prior notice, depositor shall ascertain the rates on
the value date of FD.
Interest earned on the Fixed Deposit will be subject to Tax Deducted at Source as per Income Tax
laws.
Minimum tenure for Domestic & NRO term deposits is 7 days and no interest is payable for
deposits prematurely withdrawn within the period of 7 days from the date of deposit.
Minimum tenure for NRE term deposits is 1 year and no interest is payable for deposits
prematurely withdrawn within the period of 1 year from the date of deposit.
These revised interest rates will be applicable for new deposits and renewal of existing term
deposits.
#The maximum aggregate amount that can be invested in the Tax Saver FD (80C FD) under a
single PAN is 150,000 and the same cannot be closed prematurely before expiry of the lock-in
period of 5 years.
ICICI bank staff (including retired staff) will get additional 1% rate of interest on domestic deposit
below 1 Cr.
1 crore to less
than 5 crore
5.75
5.75
5.75
6.00
6.00
6.25
6.25
6.25
6.50
6.50
6.75
7.00
7.00
7.00
7.25
7.25
7.25
7.25
7.25
7.25
7.25
7.25
6.25
6.50
6.50
6.75
7.00
7.00
7.00
7.25
7.25
7.25
7.25
7.25
7.25
7.25
7.25
6.25
6.50
6.50
6.75
7.00
7.00
7.00
7.25
7.25
7.25
7.25
7.25
7.25
7.25
7.25
6.25
6.50
6.50
6.75
7.00
7.00
7.00
7.25
7.25
7.25
7.25
7.25
7.25
7.25
7.25
6
6
6
6
7
7
7
7
7
7
7
7
7
7
7
Note:
As interest rates are subject to change without prior notice, depositor shall ascertain the rates on
the value date of FD.
Interest earned on the Fixed Deposit will be subject to Tax Deducted at Source as per Income Tax
laws.
Minimum tenure for Domestic & NRO term deposits is 7 days and no interest is payable for
deposits prematurely withdrawn within the period of 7 days from the date of deposit.
Minimum tenure for NRE term deposits is 1 year and no interest is payable for deposits
prematurely withdrawn within the period of 1 year from the date of deposit.
These revised interest rates will be applicable for new deposits and renewal of existing term
deposits.
For terms & conditions and any other details, please contact your nearest ICICI Bank Branch.
Interest will be calculated at the rate applicable for the period the deposit has actually remained
with ICICI Bank.
Penalty will be levied on the rate applicable as per the table below
Penal Rates*
Less than 5.0 crore
0.50%
1.00%
1.50%
1 crore to less
than 5 crore
5.75
5.75
5.75
6.00
6.00
6.30
6.30
6.30
6.55
6.55
6.80
7.05
7.05
7.05
7.30
7.30
7.30
7.30
7.30
7.30
7.30
7.30
For availing Fixed Deposit without premature closure facility, please contact your
relationship manager or visit the nearest branch.
Specific Terms and conditions for deposits without premature withdrawal facility
These terms and conditions ("Terms") apply to fixed deposits without premature withdrawal
facility, opened with ICICI Bank, as per the guidelines prescribed by Reserve Bank of India (RBI)
in this regard from time to time ("Fixed Deposit"). These Terms shall be in addition to and not in
derogation of the terms and conditions governing ICICI Bank Fixed Deposits available
on www.icicibank.com ("Primary Terms"). In the event of any contradiction in the Terms and the
Primary Terms, these Terms shall prevail.
The Fixed Deposit does not have premature withdrawal facility i.e. the Fixed Deposit cannot be
closed by the depositor before expiry of the term of such deposit. However, the Bank may allow
In the event of premature withdrawal of these deposits under above mentioned exceptional
circumstances, the Bank will not pay any interest on the principal amount of the deposit. Any
interest credited or paid upto the date of such premature closure will be recovered from the
deposit amount.
Auto renewal facility is not available for such Fixed Deposits at time of opening of the Fixed
Deposit account. The customer can give renewal instructions within 30 days before maturity date
of such deposit.
Minimum tenure for traditional NRO FDs without premature withdrawal facility is 3 months and
maximum tenure is 10 years
Minimum tenure for cumulative NRO FDs without premature withdrawal facility is 6 months and
maximum tenure is 10 years
Interest rates and minimum deposit value are subject to change without prior notice.
Note:
Recurring Deposits will be available for a minimum tenure of 6 months (and in multiples of 3
months thereafter) up to a maximum tenure of 10 years.
As interest rates are subject to change without prior notice, depositor shall ascertain the rates on
For terms & conditions and any other details, please contact your nearest ICICI Bank Branch.
Penalty is charged at monthly interest at the rate of 12 per 1000 for all delayed installments.
Fraction of a month will be treated as full month for the purpose of calculating such interest.
The total interest so chargeable shall be recovered from the total amount of interest payable at
the time of maturity.
Interest will be calculated at the rate applicable for the period the deposit has actually remained
with ICICI Bank.
Penalty will be levied on the rate applicable as per the table below
Penal Rates*
Original Tenure of Deposit
1 year & above but less than 5 years
5 years and above
0.50%
1.00%
1.50%
Wealth creation is an art, people acquire and master throughout their life. And when
in India, the economy is bending towards middle-class to offer you a taste of wealth
in terms of property, car or bundles of white-goods, finance companies are standing
in queue to back your good old dreams. But rate of interest is a matter of
concern of course and thus what kind of interest rate should you opt for
irrespective of the kind of loan?
While fixed rate of interest is determined by the Prime Lending Rate by the finance
companies, floating rate of interest is normally fixed on last auction rate of 91-days
government treasury bill. Prime Lending Rate or PLR is governed by the RBIs
regulation whereas floating rate of interest is the reflection of countrys inflation
scenario. But, for general people like you and me, it is not easy to understand.
Wealth creation demands discipline in due course of time which is available with fixed
rate of interest and thus fixed rate gives you the liberty to plan your future
systematically. As floating interest rate is a kind of unsystematic risk for us, it is
better to avoid this.
Let us discuss the issue with housing finance loan. The southward movement of
interest rate may tempt you to consider all the options to buy a house or purchase a
land. As a result of the periodic fluctuation of interest rate- both upward or
downward, some banks like HDFC started offering the Adjustable Rate Home Loan
(ARHL) facility to enable the well-informed, market savvy customers to take the
benefit of interest rate movements. But, that includes the potential risk of increase in
the interest rate over a period of time.
Let us assume, you are planning to take a loan of Rs 12 lakh with a tenure option of
15-20 years and want to exercise different options to make your final move. Say, the
rate of interest is 12.5 per cent per annum for both fixed rate and floating rate of
interest. Your calculation could be:
Loan
Term
Rate of
Interest
(in per
cent)
Method of
Interest
computation
EMI for
EMI per
Cost of the
Rs.12 Lakh
Rs. I Lakh
Loan *
Loan
15
12.5
Annual Rests
Rs.1,256 Rs.15,072 Rs.27,12,960
Years
20
12.5
Annual Rests
Rs.1,151 Rs.13,812 Rs.33,14,880
Years
* Equated Monthly Installments * 12 Months *Number of Years
Therefore, you can easily understand how to plan your monthly budget to meet your
EMI requirements and you can also calculate the cost of the loan when you will avail
the fixed rate of interest. But, you can not do so, if you are looking for floating rate
of interest.
In case of floating rate of interest, the rate of interest is revised generally in every
six months from the date of first disbursement, if there is a change in PLR. However,
the EMI on the will not change. For instance, if the interest rate increases, the
interest component in EMI will increase; the principal component would reduce,
resulting in an extension of the term of the loan and vice-versa when the interest
rate decreases. You will be provided with an annual statement indicating the details
of the interest and principal payments made during the year. And, ultimately, you
need to plan your budget with an uncertainty in this floating rate of interest that is
not a good move to plan your wealth.
Many people are of opinion thus that, floating rate loans are not suitable in Indian
conditions, since they do not give customers any planning options. Secondly, interest
rates have come down in the recent past, there is a little likelihood that rates will fall
to 3-4 per cent more. And study shows disbursements with floating rate of interest
accounts for only one percent of the total loan disbursement in general. People prefer
fixed rate of interest as they can work out their finances for the period of the loan
more comfortably.
Once one finance company advertised "we can loan you enough money to get you
completely out of debt" but be cautious before you take a final decision. Better to
create the wealth with discipline than to create at the cost of uncertainty.
BANKING CREDIT
Managing interest rate risk with swaps & hedging strategies
PDF
Executive summary
Interest rate swaps and other hedging strategies have long provided a way for
parties to help manage the potential impact on their loan portfolios of changes
occurring in the interest rate environment. A standard interest rate swap is a
contract between two parties to exchange a stream of cash flows according to preset terms. In essence, the transaction involves trading costs associated with two
different types of loanstypically swapping the terms of a floating rate loan for those
of a fixed rate loan or vice versa.
Borrowers may have specific objectives when choosing to participate in an interest
rate swap or related hedging strategy. For example, the goal may be to reduce
interest expense on a particular loan by swapping a higher fixed rate for a lower
floating rate. Alternatively, a borrower may wish to hedge existing interest rate risk
related to the potential that rates will move higher in the future. This is accomplished
by swapping the terms of an existing variable rate loan for those of a fixed rate loan
that will lock in the interest rate on a loan for the loan duration.
An important distinction of an interest rate swap compared to other types of financial
transactions is that principal is never exchanged. The swap represents an agreement
to exchange interest cash flows over time. Interest rate swaps are completely
customizable with flexible terms. The contract is legally separate from the hedged
item, and no upfront premium is required to execute a swap.
This paper provides an overview of the workings of interest rate swaps and related
strategies that individuals or entities may want to consider to help manage interest
rate risk. This includes a discussion of how the interest rate environment may affect
any decisions made about swaps or related hedging strategies.
Fundamental interest rate considerations
Interest rate swaps typically involve trading of a variable rate loan structure for one
with a fixed rate or vice versa. Before considering the viability of pursuing an interest
rate swap, it is important to understand some underlying fundamentals about loans
and how they may influence a swap strategy.
Loans can typically be structured either with a floating rate or a fixed interest rate.
Each comes with its own advantages and disadvantages.
Chart
These are factors that need to be considered not only when first obtaining a loan, but
also when considering whether to swap a loan for one with different terms.
Another consideration is the current state of the interest rate market. While the
future direction of interest rates is not predictable, historical trends can provide some
guidance on potential future trends. This may impact a hedging strategy.
Why consider an interest rate swap?
There are a variety of reasons that an interest rate swap might be considered:
To lock in a fixed interest rate, taking advantage of a favorable environment and
removing interest rate risk as a consideration.
To reduce current interest expense by swapping for a floating rate that is lower than
the fixed rate currently being paid without having to refinance a loan and pay the
associated costs.
To more effectively match interest rate sensitive assets and liabilities.
To better diversify financial risks in a loan portfolio by converting a loan portfolio
from all fixed or all variable to a mix of the two.
To change the interest rate composition of a current loan without facing the expense
associated with refunding or issuing new debt.
Mechanics of an interest rate swap
An interest rate swap represents a derivative product. When two parties agree to an
interest rate swap, they are trading interest rate arrangements. In a typical case, a
borrower that currently carries a loan with a variable interest rate arranges with a
counterparty (such as U.S. Bank) to swap loan terms, exchanging the variable rate
for a fixed rate. The borrower will pay a fixed rate plus any spread that is applied to
the proxy used to determine the variable rate. In return, the counterparty provides
payment of the lending rate (not including any spread), so that portion of interest is,
in essence, canceled out for the borrower.
The exchange includes only interest cash flows over time, with no principal involved.
Each party is simply swapping its existing obligation for the desired obligation. The
fixed rate is based on an average of expected future floating rates.
environment and discuss potential strategies to position the portfolio in a way that is
consistent with your objectives.
Contributed by:
David Crittendon
Managing Director of Banking, Colorado, The Private Client Reserve of U.S. Bank
Polly Ip
Vice President, Derivative Products Group, U.S. Bancorp Capital Markets
1 The London Interbank Offered Rate, a benchmark interest rate that some banks
charge for short-term loans. This is commonly used to calculate rates on a variety of
loans.
2 The interest rate at which a depository institution lends funds on an overnight basis
to another depository institution. It is considered an influential interest rate in the
U.S. economy since it affects monetary and financial conditions.
IMPORTANT DISCLOSURES
Investment products and services are:
Disclosures
The information provided represents the opinion of U.S. Bank and is not intended to
be a forecast of future events or guarantee of future results. It is not intended to
provide specific investment advice and should not be construed as an offering of
securities or recommendation to invest. Not for use as a primary basis of investment
decisions. Not to be construed to meet the needs of any particular investor. Not a
representation or solicitation or an offer to sell/buy any security. Investors should
consult with their investment professional for advice concerning their particular
situation.
EOL
Credit products are offered by U.S. Bank National Association and subject to normal
credit approval. Deposit products are offered by U.S. Bank National Association.
Member FDIC.
U.S. Bank and its representatives do not provide tax or legal advice. Each individual's
tax and financial situation is unique. Individuals should consult their tax and/or legal
advisor for advice and information concerning their particular situation.
www.icicibank.com
www.karvy.com
www.investopedia.com
www.usbank.com
www.reserve.usbank.com