Fixed and floating interest rates

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Friday, April 23, 2010
Fixed and floating interest rates
In fixed rate, the rate of interest, once fixed, will not change during the entire period of loan. In floating rate, the rate of interest changes, depending upon the market conditions, subIetto the reset clause, if any, incorporated in the loan agreement. Thus, on every reset, the rate may increase or decrease.A fixed rate is when a bank issues a loan in which the ROl is fixed say 1 0% per annum for 5 years.A floating rate is when the lender asks the borrower to pay a rate of.interest say “inflation rate + 5%.” Here the rate of interest will be reset every half year based on the inflation rate prevailed in the previous half year. For example, if the 1 st half year Inflation is 5%. thenthe2nd half yeorrateof interestwillbe5% + 5% = 10%. lfthesecond HYinflation is 4% then the 3rd HY ROl will be 4% + 5% = 9%. The floating rates