Interest rates are an important factor that directly affects investors' decisions. Among them, floating interest rates attract special attention because their volatility can have a great impact on investment portfolio optimization. So what is floating interest rate? Let's learn about the concept and how to calculate floating interest rates with Coin68 through the article below!
What is floating interest rate? Learn about the concept and how to calculate floating interest rates
What is floating interest rate?
Floating interest rates are non-fixed interest rates that change according to the market based on indicators such as the State Bank's base interest rate or market interest rates. This interest rate adjusts typically every 3, 6 or 12 months, rather than remaining the same throughout the loan term.
Normally, floating interest rates are higher than fixed interest rates, but there are also cases where floating interest rates increase due to bank adjustments, depending on the financial market situation. In investing, floating interest rates are also used to value and make investment decisions on financial products such as crypto, stocks, bonds or debt-based products.
How to calculate floating interest rates and how to apply them in practice
The floating interest rate is calculated according to the following formula:
In there:
- Base interest rate: This is the interest rate set by the central bank or financial institutions. It is used to determine the loan interest rate after the bank adjusts it. The base interest rate can be based on savings deposit interest rates, interbank market interest rates or other indices.
- Interest rate margin : This is the percentage difference between the lending interest rate and the deposit interest rate at the bank at the same time. In other words, this is the difference between the interest rate the bank earns on loans and the interest rate the bank pays to depositors. The interest rate margin is clearly stated in the credit contract.
Normally, for each loan, the interest rate will be fixed for a certain period of time, then it will switch to a floating interest rate.
How to calculate loan interest at fixed interest rate:
How to calculate loan interest based on floating interest rate:
For example: Customer A borrows 100 million VND from the bank with a 12-month term. For the first 3 months, the fixed interest rate is 1%/month. From the 4th month onwards, the floating interest rate applied is 1.25%/month. So what is the total debt that customers need to pay after the 12-month term?
Calculation:
- Step 1 : Calculate interest rate for the first 3 months:
Monthly interest rate = 100,000,000 x 1% = 1,000,000 VND.
Total interest rate in the first 3 months = 1,000,000 x 3 = 3,000,000 VND.
- Step 2 : Calculate the floating interest rate from the 4th to the 12th month:
Monthly interest rate = 100,000,000 x 1.25% = 1,250,000 VND.
Total interest rate from month 4 to month 12 = 1,250,000 x 9 = 11,250,000 VND.
- Step 3 : Calculate the total interest rate for 12 months:
Total interest rate = 3,000,000 + 11,250,000 = 14,250,000 VND.
- Step 4 : Calculate the total debt that needs to be paid:
Total debt = Principal amount + Total interest = 100,000,000 + 14,250,000 = 114,250,000 VND.
So, the total debt that needs to be paid by the customer in 12 months is 114,250,000 VND.
Note: The above calculation is just a simple example. In reality, calculating interest rates is much more complicated because loans will have different maturities and floating interest rates will change in different installments.
Compare fixed interest rates and floating interest rates
Fixed interest rate | Floating rate | |
Define | The interest rate is determined in advance and does not change during the loan term. | An interest rate that changes over time and is adjusted based on financial market indices. |
Stability | Stable and unchanged throughout the loan term. | Unstable and subject to change according to financial market fluctuations. |
Can predict | Interest payments can be predicted because the interest rate does not change throughout the loan term. | It is impossible to predict future interest payments because floating interest rates change periodically. |
Expense | Usually has higher costs than floating interest rates. | Usually has lower costs than fixed interest rates. |
Risk | There is no risk of market fluctuations. | There is risk as markets fluctuate and interest rates rise. |
Factors affecting floating interest rates
- Inflation : Inflation is one of the factors that have the strongest impact on floating interest rates. When inflation increases, banks often increase interest rates to curb inflation, leading to floating interest rates also increasing. On the contrary, when banks want to promote economic growth, they can reduce interest rates, causing floating interest rates to decrease.
- Economic situation : The general economic situation also has a significant impact on floating interest rates. As the economy develops, demand for Capital increases, allowing banks to increase interest rates. Conversely, during a recession, demand for Capital decreases, putting pressure on interest rates.
- Base interest rate : Base interest rate is the interest rate prescribed by the State Bank and applied to commercial banks. Changes in the base interest rate directly affect commercial banks' Capital costs, thereby affecting the floating interest rates they apply to customers.
- Capital demand : Capital demand in the market also affects floating interest rates. When Capital demand increases, banks can increase interest rates to attract deposits and other Capital sources, offset Capital costs and ensure profits.
summary
Hopefully with the above article, Coin68 has helped users better understand floating interest rates as well as how to calculate them. Floating interest rate is also one of the most important indicators to measure and manage investment portfolios when investors use loans to optimize the portfolio.
Note: Coin68 is not responsible for any of your investment decisions. Wishing you success and earning a lot of profit from this potential market.
