# Market rate

The market rate ( English market interest rate ) is in finance , the general expression of the interest rate on a financial market .

## General

Since the interest rate is generally considered a price , the market rate is the price in a financial market. The level of market interest rates depends on maturity , market breadth , market liquidity and currency of a financial product and the rating coming expressed creditworthiness of the issuer from, the market rate so one is always risk premium priced. In addition, the interest rate expectations of market participants play a role with regard to the market development of the market interest rate. Due to its objective creation through the laws of the market mechanism , it also serves as a reference value for non-banks outside the financial sector .

## species

The markets in which interest appears are primarily markets for money , credit and capital and secondarily for goods ( commodities ), the trade of which is associated with financial transactions . The interest here represents a price based on the term for the use of money, credit or capital (or goods in the case of trade credit ).

The financial markets include the money and capital markets , and accordingly there are money market rates and capital market rates for the various interest-bearing financial instruments . This is why there is no uniform market interest rate because the interest rate level is usually different in these market segments . On the money market, the interest rates for overnight money and time money trading or for money market paper are the market interest rates . The following are considered important money market rates:

• EONIA ( Euro Over Night Index Average ): Market rate for overnight money .
• EURIBOR ( European Interbank Offered Rate ): Market interest rate for short-term money on the futures market with a term of up to 12 months.
• LIBOR ( London Interbank Offered Rate ): Market interest rate for short-term money with a term of up to 12 months.
• Singapore Interbank Offered Rate (SIBOR) in Singapore , CHIBOR ( People's Republic of China ), TIBOR ( Tokyo ): like LIBOR.

In the money markets in particular, the market interest rate depends on the key interest rate of the respective central bank , and in the Eurosystem on the main refinancing instrument .

The capital market known as market interest rates, the dividend yield ( shares ) and bonds , the yield on issue ( primary market ) or the current yield ( secondary market ).

In addition to the level of interest rates, money and capital market rates also show other differences. A study of German money market rates between January 1996 and January 2006 showed a change in market rates almost every week, with the frequency of the changes increasing as the fixed interest rate increased. In contrast, the interest rate cycles for capital market rates were less pronounced than for money market rates in the same period. While the duration of the market interest rate change on the money market was subject to maturity-dependent fluctuations, no connection between fixed interest rates and the frequency of adjustment could be established on the capital market.

## Economics

The Swedish economist Knut Wicksell made a distinction in 1898 between “natural interest” and market interest (“money interest”). For him, the “natural rate of interest” was an interest rate that saves just as much as there is a need for capital for investments . The market interest rate resulted from the business conduct of the credit institutions and was an imbalance interest rate . Both types of interest agree if the banks do not make use of their ability to create money in their business practices , so that there is no impact on the price level of goods prices.

John Maynard Keynes' ideas were very similar to Wicksell's theses. In his book “A Treatise on Money”, published in 1930, Keynes understands market interest rate to be the connection between long-term loan interest and short-term bank interest . The inertia of the market rate is due, according to Keynes, to the imperfections of the credit market . Keynes later used the market interest rate in his February 1936 book General Theory of Employment, Interest and Money to prove when an investment is still worthwhile. If the marginal efficiency of the capital employed is greater than the market interest rate, entrepreneurs will choose to invest and vice versa. The actual scope of investment is accordingly expanded until “there is no longer any class of capital goods whose marginal efficiency exceeds the current interest rate”.

If the capital stock is optimal, the marginal efficiency of the capital employed corresponds to the market interest rate in a behavioral equation : ${\ displaystyle i_ {r}}$${\ displaystyle i}$

${\ displaystyle i = i_ {r}}$

If the capital stock is below the optimum, the marginal performance of the capital employed is higher than the market interest rate and vice versa, investments are made until the marginal performance of the capital corresponds to the market interest rate.

## Legal issues

For the purpose of consumer protection , the case law initially developed criteria to curb excessive interest demands by credit institutions in credit agreements. The upper limit should be usury , a subspecies of usury . If the offense of excessive interest is present, the loan agreements concerned are void with the result that the excessive interest claims do not apply either. In 1966 the Federal Court of Justice (BGH) began to apply the offense of usury. He considered the criterion of usury for smaller business loans with an annual interest rate of 114.3% and 130.9% to be met. If he still used absolute interest rates here, he began in July 1982 with installment loan agreements with a comparison between the contractual interest rate and the market interest rate. According to this, usury occurs when the effective contract interest rate relatively exceeds the market interest rate by 97%, i.e. approximately twice the interest rate. However, the BGH draws a justified limit. According to this, it is not about usury of interest rates if an unusually high credit risk speaks in favor of the agreed interest rate.

The law mentions the market rate as in the evaluation of the provisions in § 253 para. 2 sentence 2 HGB , according to which this balance sheet item with a residual maturity of more than one year with the average market interest rate discounted is. For pension provisions and similar long-term provisions, an average market interest rate with a remaining term of 15 years is to be used.

## use

The market rate is the reference rate in the lending business of credit institutions ingredient in loan agreements of all kinds ( overdrafts , consumer loans , collateral loans , overdrafts , investment loans , real estate loans ), also in the international credit transactions ( facilities / lines of credit , stand-by loans , roll-over loans , Revolving Credit Facility ). In loan agreements, the market interest rate (loan interest rate) must be defined in more detail, in particular whether it should apply as a fixed or variable interest rate , how long it is agreed ( fixed interest period , interest escalation clause ) and which credit margin is added to a reference interest rate . This also applies to all bonds . In the deposit business , the market interest rate ( credit interest rate ) determines the prices for interest-oriented financial products ( sight deposits , time deposits , savings deposits or savings bonds ). The same transparency rules apply here as in the lending business. For investments, the market interest rate for entrepreneurs is the benchmark when determining the marginal performance of the capital employed.

The term market interest rate is often used for the comparative value of the “market interest rate”. The Federal Finance Court (BFH) understands this to mean an interest rate for comparable loans that banks granted their customers to their customers in the period in question, for which it therefore consults the Bundesbank's interest rate statistics. There are publications of various market rates for the base rate or for the MFI interest rate statistics of the Bundesbank and ECB, which have been collected uniformly in all EU member states since January 2003 . These show average interest rates resulting from the interest rates applied by banks in the lending business. The interest rates are calculated as volume-weighted average rates across all new agreements for deposits and loans concluded during the reporting month.

## Individual evidence

1. Winfried Störrle, The market interest rate in the entrepreneurial investment decision , 1970, p. 47
2. Erich Schäfer , The Enterprise , 1963, p. 28
3. ^ Andreas Rümmele, Interest rate adjustment behavior of banks when setting interest rates in retail banking , 2009, p. 77
4. ^ Andreas Rümmele, Interest rate adjustment behavior of banks when setting interest rates in retail banking , 2009, p. 78
5. Knut Wicksell, Geldzins und Güterpreise , 1898, p. 93 ff.
6. Knut Wicksell, Geldzins und Güterpreise , 1898, p. 93
7. ^ John Maynard Keynes, Vom Gelde , 1930, p. 163
8. ^ John Maynard Keynes, Vom Gelde , 1930, p. 465
9. ^ John Maynard Keynes, General Theory of Employment, Interest, and Money , 1936, p. 136
10. ^ Artur Woll, Volkswirtschaftslehre , 2011, p. 326
11. BGH WM 1966, 399, 400
12. The market interest rate can be found in official interest rate statistics from the Bundesbank and the ECB
13. ^ BGH, judgment of July 8, 1982, Az .: III ZR 21/81
14. BGH NJW 1994, 1275
15. BFH, judgment of May 4, 2006, Az .: VI R 28/05
16. ^ Deutsche Bundesbank, Deposit and Lending Rates , August 2016