Market interest rate

Definition

The market interest rate is the prevailing rate of interest determined by supply and demand in the market. It influences the pricing of long-term liabilities such as bonds and loans.

5 Must Know Facts For Your Next Test

1. Market interest rates fluctuate based on economic conditions, inflation, and monetary policy.
2. The market interest rate affects the coupon rate of new bonds issued by companies.
3. When market interest rates rise, the price of existing bonds typically falls.
4. Market interest rates are a key factor in determining the yield to maturity for long-term debt instruments.
5. Companies must consider current market interest rates when deciding to issue new debt or refinance existing debt.

Review Questions

Related terms

Coupon Rate: The annual interest rate paid by bond issuers to bondholders, expressed as a percentage of face value.

Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures.

Refinancing: The process of replacing an existing debt with a new one that has different terms, often influenced by current market interest rates.