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Loan Indexes
There are many possible loan
indexes. Some are listed below. Each one has distinct market
characteristics and fluctuates differently. The most common
indexes are:
Constant
Maturity Treasury (CMT or TCM)
These indexes
are the weekly or monthly average yields on U.S. Treasury
securities adjusted to constant maturities.
Constant Maturity
Treasuries is a set of "theoretical" securities based on the
most recently auctioned "real" securities: 1-, 3-, 6-month
bills, 2-, 3-, 5-, 10-, 30-year notes, and also the
'off-the-runs' in the 7- to 20-year maturity range. The Constant
Maturity Treasury rates are also known as "Treasury Yield Curve
Rates".
Yields on
Treasury securities at "constant maturity" are interpolated by
the U.S. Treasury from the daily yield curve, which is based on
the closing market bid yields on actively traded Treasury
securities in the over-the-counter market.
The CMT
indexes are volatile and move with the market. They reflect the
state of the economy, and respond quickly to economic changes.
These indexes react more quickly than the COFI index or the MTA
index.
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Treasury Bill (T-Bill)
These indexes are based on the results of
auctions that the U.S. Treasury holds for its Treasury bills,
notes and bonds.
Treasury
bills are issued by the U.S. government with maturities of 1, 3
and 6 months (4-week, 13-week, 26-week bills or 28-day, 91-day,
182-day bills) in order to pay for the national debt and other
expenses. The 3- and 6-month Treasury bills are auctioned every
Monday and the resulting figures are released to the public the
next day. Treasury bill auction results provide the discount
rate*, investment yield, and price for recently auctioned bills.
* The discount rate
is an annualized rate of return based on the par value of the
bills and is calculated on a 360-day basis. The investment
yield, or coupon-equivalent yield, is calculated on a
365-day basis and is an annualized rate based on the purchase
price of the bills and reflects the actual yield to maturity.
T-Bill
indexes have both weekly and monthly values. Monthly values are
averages of the past month's weekly T-Bill rates.
The Treasury
Bill indexes move with the market and respond quickly to
economic changes like the CMT indexes.
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12-month Treasury Average (MTA
or MAT)
The Monthly Treasury Average, also known as
12-Month Moving Average Treasury index (MAT) is a relatively new
ARM index. This index is the 12 month average of the monthly
average yields of U.S. Treasury securities adjusted to a
constant maturity of one year. It is calculated by averaging the
previous 12 monthly values of the 1-Year
CMT.
Because this index is an annual average, it is
steadier than the 1-Year CMT index. The MTA and CODI indexes
generally fluctuate slightly more than the 11th District COFI.
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11th District Cost of Funds Index
(COFI)
This index reflects the weighted-average interest
rate paid by 11th Federal Home Loan Bank District savings
institutions for savings and checking accounts, advances from
the FHLB, and other sources of funds. The 11th District
represents the savings institutions (savings & loan associations
and savings banks) headquartered in Arizona, California and
Nevada.
Since the
largest part of the Cost Of Funds index is interest paid on
savings accounts, this index lags market interest rates in both
up trend and downtrend movements. As a result, loans tied to
this index rise (and fall) more slowly than rates in general,
which is good for you if rates are rising but not good for you
if rates are falling.
The 11th
District Cost Of Funds Index is the slowest moving and most
stable of all loan indexes. It smoothes out a lot of the
volatility of the market.
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London Inter Bank Offering Rates (LIBOR)
London Inter Bank Offering Rate (LIBOR) is an
average of the interest rate on dollar-denominated deposits,
also known as Eurodollars, traded between banks in London. The
Eurodollar market is a major component of the International
financial market. London is the center of the Euro market in
terms of volume.
The LIBOR
is an international index which follows the world economic
condition. It allows international investors to match their cost
of lending to their cost of funds. The LIBOR compares most
closely to the 1-Year CMT index and is more open to quick and
wide fluctuations than the COFI rate.
There are
several different LIBOR rates: 1-, 3-, 6-Month, and 1-Year
LIBOR. The 6-Month LIBOR is the most common.
LIBOR-indexed
loans offer borrowers aggressive initial rates and have proved
to be competitive with such popular indexes as the 11th District
Cost of Funds, the 6-Month Treasury Bill, and the 6-Month
Certificate of Deposit. With the LIBOR indexed loans, borrowers
are generally protected from wide fluctuations in interest rates
by periodic and lifetime interest rate caps.
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Bank Prime Loan (Prime Rate)
The Prime Rate is the interest rate charged by
banks for short-term loans to their most creditworthy customers
whose credit standing is so high that little risk to the lender
is involved. Only a small percentage of customers qualify for
the prime rate, which tends to be the lowest going interest rate
and thus serves as a basis for other, higher risk loans.
The rate is
almost always the same amongst major banks. Adjustments to the
prime rate are made by banks at the same time. Although, the
prime rate does not adjust on any regular basis. The prime rate
is not very volatile index however it generally rises quickly
but declines very slowly.
Many home-equity loans
and lines of credit are tied to the prime rate as published in
the Wall Street Journal. The Journal number is derived from the
rate posted by at least 75 percent of the 30 largest U.S. banks.
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