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Interest Rate Instruments

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Treasury Bills

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Short-term debt securities issued by the government, mature in less than a year, and typically sold at a discount from the par value. Interest rate changes inversely affect the price of Treasury Bills.

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Zero-Coupon Bonds

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Debt securities that do not pay periodic interest. Instead, they are issued at a discount and redeemed at face value at maturity. They are highly sensitive to changes in interest rates due to their long durations.

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Certificates of Deposit (CDs)

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Time deposits offered by banks with specific fixed terms, paying interest. Rates are typically fixed, but there are also variable-rate CDs which can change with market interest rates.

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Corporate Bonds

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Long-term debt issued by corporations to fund investments, potentially offering higher yields than government securities but with greater risk, including interest rate risk which affects their prices inversely.

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Municipal Bonds

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Debt securities issued by state and local governments, often tax-exempt. Longer maturities mean higher interest rate risk, and thus prices are more volatile with changes in interest rates.

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Commercial Paper

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Unsecured, short-term debt issued by corporations, usually maturing within 270 days. The price can be more sensitive to changes in interest rates compared to longer term debt.

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Inflation-Linked Bonds

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Securities such as TIPS (Treasury Inflation-Protected Securities) that offer protection against inflation. Their principal value adjusts with inflation, and interest rate changes affect them differently than nominal bonds.

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Federal Funds Rate

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The interest rate at which depository institutions lend reserve balances to other depository institutions overnight. The rate is influenced by the Federal Reserve and changes impact the cost of borrowing and the overall economy.

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Interest Rate Swaps

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Financial derivatives where two parties exchange interest rate cash flows, one with a fixed rate and the other with a floating rate. Value and payments can change significantly with interest rate movements.

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Adjustable-Rate Mortgages (ARMs)

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Home loans with interest rates that adjust over time based on an index. When interest rates rise, the monthly payments may increase, and vice versa when interest rates fall.

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Treasury Bonds

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Long-term debt instruments issued by the U.S. government, with maturities exceeding 10 years. They pay semi-annual coupons and are highly sensitive to interest rate movements.

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Treasury Notes

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Intermediate-term government debt securities, with maturities ranging from 2 to 10 years. They pay semi-annual interest and are sensitive to interest rate changes; prices fall when interest rates rise.

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