Bank Analysis School Case Study

APPENDIX A - DEFINITION AND TYPES OF INTEREST RATE RISK APPENDIX B: Common Interest Rate Indices

Federal Funds Rate •Interest rate banks charge each other for overnight lending •Managed by the Federal Reserve to control inflation and maintain a healthy economy •Changes in this rate will impact most other interest rates Prime Rate •Interest rate banks charge their most creditworthy loan customers •Generally 300 basis points higher than the Federal Funds rate •Popular index used to set rates on many types of loan products, including commericial loans, auto loans, home equity lines of credit, and credit cards Secured Overnight Funding Rate (SOFR) •Replacing LIBOR •Benchmark rate at which some of the world's largest banks lend to each other •Adjustable‐rate mortgages are often linked to SOFR Constant Maturity Treasury Rates •Based on U.S. Treasury bond yields •Adjustable‐rate mortgages are often tied to these rates Cost of Funds Index (COFI) •Reflects the weighted‐average interest rate paid for funding by banks within a certain region (e.g. 11th Federal Home Loan Bank district) •Usually lags other interest rates in both up and down markets •Sometimes used to set the price of variable‐rate loans and adjustable‐rate mortgages