What is the Central Bank discount rate? Bond yield - their types and calculation formula Who sets the discount rate of interest.

A bond is an issuance character that provides the right to accept from the issuer a regular percentage of the nominal price of the bond (coupon payment), as well as a full return of the bond's face value at the time of its maturity.

This security is an analogue of a bank deposit, because funds are also invested here for a predetermined period and at a single percentage. Another similarity is that the size of the bet or income is approximately the same for both instruments at once.

The difference lies in the fact that the yield on a bond can change, because the market price of this instrument changes, and the size of the income interest rate can reach tens, and sometimes hundreds of percent per annum in moments of economic instability.

Bond parameters

1. Price, which can be nominal, issue and market
2. The redemption date is the date when the issuing company undertakes to return the full amount of the debt (or face value)
3. Redemption price or the procedure for its establishment, usually such a price is equal to face value
4. Coupon interest rate, expressed as a percentage of the nominal price. For example, 5% per annum of the face value of 1000 rubles. or 50 rubles. in a year.
5. Coupon Payment Dates - Usually coupons are redeemed annually, semi-annually or quarterly.

Coupon yield of bonds

Shows the investor how much income he will receive if he purchases a bond at a nominal price. The coupon yield of bonds is calculated according to the formula given above.

Current yield

Gives an idea of ​​how much income an investor can expect if he buys a bond at the current market price. The current bond yield is calculated using the formula disclosed above.

Total return

A bond's yield to maturity reflects the entire amount of profit that an investor can expect if he buys it at the current price and holds it until the end of its circulation period.

Fair value (or total yield) of a coupon bond calculated as follows.

Let's understand what the federal funds rate is. And then we move on to the question of the discount rate, which is often confused with the federal funds rate. Federal funds rate. And the discount rate. They are related but differ in implementation. The federal funds rate is the planned increase in the amount when banks lend each other a certain amount. Let's say we have bank number 1. This is bank number 1. This is bank number 2. This bank has an abundance of cash. I already painted in green, now I'll paint in gold. So Bank 1 has an excess and Bank 2 needs money. Bank 1 wants to lend them to Bank 2 if Bank 2 pays 6% for an overnight loan. How is the Federal Reserve reacting? This is too high a bet. It is necessary that banks give loans at a reduced rate, that is, it is necessary to enter into open transactions that would reduce this percentage. Here is the balance sheet of the national bank. I'll paint it purple. Like this. Oops, not that instrument. Like this. Here's half. And another half. These are the current assets of the Federal Reserve. We'll talk more about this in another video. So, these are the assets of the Federal Reserve. And these are liabilities. Liabilities are slightly smaller than assets, which means they have little capital. Their assets are slightly different from traditional ones. But this is not much. Only dividends, but we will not go into details. And, in effect, the federal reserve for public operations is printing money. That is, the federal reserve creates banknotes or reserves. These are the same banknotes that are stored in our wallets or something that can be transferred to reserve banknotes from your accounts through a computer database. But nothing appears out of thin air, there must be a compensating liability to the national bank. And so are Federal Reserve notes in circulation. Which means the Fed has a liability if anyone comes for their money. These are Federal Reserve Bank notes - circled in yellow - issued by the Federal Reserve Bank. It is a federal reserve bank vouched for by the US government. All the subtleties that we discuss are just a mechanism. Banks take money and use it to buy securities from people all over the world. Whether I, my grandfather, even one of these banks. Let's say someone owns a security. Now I'll draw, let's say it's me. I have a treasury bill. Treasury bill. Let's say I have a lot of Treasury bills. I am the richest in the country. Or it could be China. China has many. And the bank buys his bills. He no longer has banknotes, but a security. Valuable paper. And I am no longer the owner of the security, because I sold it to the Federal Reserve Bank. And I don't know who bought it from me. Another person or another country. In our case, it was the Federal Reserve System, the Fed. Now I have reserves, that is, money. Fed banknotes. And what should I do with these banknotes? I'll make a bank deposit - I'll have a couple of bank accounts. For example, I put a part in an account in this bank, and a part in an account in this bank, let's say so for simplicity. What is happening now? This bank can lend more, but this one needs less. Demand has dropped. Demand is down, right? It needs less. Here the demand fell, but here the supply increased. It is known that when buyers need less than what is sold, the price when buying or borrowing falls. There is more here, but here you need less, and now this bank is no longer willing to pay 6% for a loan. And this bank has an incentive to lend money at interest, so it will lower the rate to 5%, which the borrower agrees to pay. The Federal Reserve Bank will be buying and selling paper to balance things out. If the rates are too low, for example, 3%, which does not suit the Fed, then you need to raise the rate on loans. Then they will do the opposite, that is, they will sell this security. They will take the security and sell it to someone else. For example, this person. He has a one dollar bill. And his accounts are in one of those banks. For example, couple here and couple here. When the Fed sells paper to that person, they can wire transfer or cash out right away. So the reserves disappear from here and go back to the Federal Reserve Bank. In the bank, they compensate the debt. It can be said that money disappears, and the result will be an increase in demand due to a decrease in the reserves of the system. Demand will rise and supply will fall due to the decrease in available reserves. Banks have less funds for issuing loans, they ask borrowers more, and those, out of desperation, agree to pay a higher rate of 4%. All this works effectively in a world where banks borrow money from each other at interest. For example, one of the banks is ready to give money at interest to another bank, as it will receive it the very next day, and this is all a matter of supply and demand. This is an overnight or overnight loan, its risk is very, very low. But what is happening in the world? Let's depict the same two banks. Bank 1, bank 2. The first has more reserves. The second has less. The second one needs funds. People are freaking out and taking deposits from this bank, right? We all know that the bank does not have the funds to return all the deposits at once. I'll draw the balance sheet of the second bank. Let him be here. He will have, I hope... Yes, here we will have capital and deposits. Yes, let it all be deposits. There should be reserves, that is, assets - right here - depending on the reserve rate, since there should be reserves in case people ask to cash out their funds. And these will be assets that are invested in something, money makes money and brings income in the form of interest. What happens if the reputation of the bank is shaken? People go to the bank and start withdrawing deposits and then take them to a more reliable bank or keep them at home. This bank has a liquidity problem, because people are taking money. If every day people come and ask to cash out a deposit, a general panic can begin when, at the first request, the bank can no longer return the money. Everyone will urgently need their deposits, and there will be a liquidity crisis. Bank 2 will need funds from Bank 1, and at the beginning of the video, a similar situation was considered. A loan would be issued at interest. But what if Bank 1 also doesn't trust Bank 2 because it's in trouble? There is a crisis, it is not known what the capital of this bank is. Perhaps there are almost no assets. Such examples have been observed recently. Perhaps problems with the payment of mortgage loans. And bank 1 will refuse. Bank 2 will become a pariah of banking society. Nobody will give him a loan. Nobody wants to take risks. If the bank cannot pay the depositor - and this is the weak link of the fractional reserve system - the only weak link undermines the credibility of the banking system, people do not believe in security and start taking money. Rumors about the inability to give out a deposit spread quickly, and the press helps a lot here. People in fear can start taking deposits from all banks in a row. In such cases, the Fed offers a discount window. Let's look at the balance sheet of the Federal Reserve Bank. The discount window may be the banks' last resort. There is a federal rate. Let's say it's 6%. In a normal situation, another bank would issue a loan at 6%. But there are cases of a complete collapse of the system, and the leadership here is in complete despair. Then you can borrow money from the federal reserve. Again, these are Federal Reserve Bank assets. Assets. These are passives. This is federal reserve capital. In this case, the National Bank will issue securities into circulation and lend them to this bank. The bank will receive the papers from the federal reserve on the security of some assets. Suppose he has other assets that are difficult to sell. He does not want to sell in a hurry, and will more readily put them in the reserve bank. This is called a repurchase operation, when you borrow money against collateral. There will be a separate video for these deals. The overall picture is that the bank is on the verge of bankruptcy. No one will lend, and the federal funds rate is no longer an issue. He uses the discount window and borrows from the state, the last possible lender. The rate of this loan is called the discount rate. This is the percentage that the bank pays to the Federal Reserve Bank when no one lends it overnight. Typically, the discount rate is higher than the federal funds rate. As always. If it were lower, the banks would always immediately use the discount window, rather than contacting each other. We will see that in difficult situations this system is used quite often. Historically, the discount rate has been a percentage above the stock rate and the banks have borrowed from each other, but recently it has fallen and all rates are almost zero. But we'll talk about that later. The Fed usually sets rates, and it's usually the federal funds rate, and the discount rate also changes, but stays just above the stock rate. This is for emergency loans. This is for current loans to ensure sufficient reserves for the functioning of banks. See you in the next video. Subtitles by the Amara.org community

Discount rate, or refinancing rate is an instrument of monetary regulation, one of the methods of anti-inflationary policy, with the help of which the Central Bank influences the interbank market and the country's economy. This monetary policy instrument determines:
1) The cost of attracted and placed monetary resources for the subjects of the monetary market.
2) The amount of the interest rate at which the Central Bank provides interbank loans as a lender of last resort. Consequently, the discount rate is the lowest among all existing interest rates.
Reducing it makes loans cheap for commercial banks, and they tend to get a loan. At the same time, excess reserves of commercial banks increase, causing an increase in the amount of money in circulation. Conversely, an increase in the discount rate makes loans unprofitable. What's more, some commercial banks that have leveraged reserves are trying to repay them as they become very expensive. The reduction in bank reserves leads to a reduction in the money supply.

3) Interest rates of commercial banks on issued loans for legal entities and individuals, which are higher than deposit ones.
4) Deposit rates. As a rule, banks try to set the deposit rate slightly lower than the discount rate in order to make a profit.
5) Adjustment of the exchange rate of the national currency to foreign currencies. Exchange rates determine the inflow or outflow of foreign investment in the country. Discount rates are the main factor determining the attractiveness of the economy for investors.
6) The cost of government securities on the open market.
7) The amount of inflation, which should be moderate.
An increase in the SA leads to a slowdown in economic growth. The reason is that the decrease in the level of loans makes consumers and commercial structures save money, which leads to a decrease in economic activity and the accumulation of money outside the banks.
Reducing interest rates leads to an increase in the number of loans issued by both consumers and organizations, which, in turn, leads to an increase in costs, thereby contributing to economic growth.
8) Fiscal measures: calculation of the tax base, fines, penalties, etc.

How the refinancing rate is set

The size of the discount rate is set by the Council of the Central Bank, depending on various factors, such as: expectations regarding the level of inflation, acceleration or deceleration of GDP growth, general economic development trends, macroeconomic and budgetary processes, the state of the monetary market, price stability, etc.
This tool is one of the levers for managing the financial and economic situation in the country, therefore, it is impossible to raise or lower the rate without a reason: there must be strong macroeconomic arguments for changes.
By changing the discount rate, the Central Bank implements a discount currency policy to regulate the movement of capital and balance payment obligations.
The size of the discount rate is the one that must be made public through the media every time the size of the rate has changed. For example, as of 2014, the Board of Directors of the Bank of Russia announced the current refinancing rate equal to 8.25%.

Nominal and real rates

It is necessary to distinguish between real and nominal discount rates.
The nominal discount rate is calculated taking into account the expected inflation, as a result of which it often does not coincide with the real one.
Real discount rate = nominal discount rate - expected inflation
The nominal rate is the base rate that can be observed (i.e. interest on bonds).

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It is directly related to lending and the banking sector. The discount rate is the main indicator of the monetary policy of the Central Bank.

Discount rate in Russia

The discount rate is the interest rate at which the Central Bank lends to commercial banks. Sberbank, Russian Agricultural Bank, VTB and other institutions receive funds, which they subsequently issue to the public and legal entities, from the Central Bank at a percentage determined by the discount rate.

The discount rate is the refinancing rate, which shows the percentage increase in the value of securities issued by the state. An investor, purchasing government bonds, upon expiration of the contract, receives their value increased by the official discount rate set by the Central Bank.

Discount rate value

Adjusting the discount rate is the most important tool in determining the value of a currency. The more stable the economic situation in the country, the lower the refinancing rate. The Central Bank raises the rate in times of crisis in the state in order to stabilize the situation. What does the discount rate affect?

• interest rates on loans and deposits - with an increase in the discount rate, they grow, although in developed countries the dynamics will be more noticeable than in developing ones;
• the amount of penalties - are charged on taxes, fines and contracts in case of delay in payments in the amount of 1/300 of the refinancing rate for each day;
• the amount of monthly payments on loans with floating rates linked to the accounting index;
• the volume of investments in the country - the lower the rate, the more profitable it is for the investor to invest, with its increase, there will be an outflow of capital;
• exchange rate dynamics - if the discount rate rises, this leads to a weakening, and as a result, a devaluation of the national currency.

The discount rate and inflation rate are inversely proportional. If the Central Bank raises the rate, this will lead to a slowdown in economic growth and a decrease in purchasing power for goods - inflation in the country will decrease.

Discount rate- financial term, financial category used to characterize the following processes related to lending:

The discount rate refers to the interest rate at which the Central Bank of the country provides loans to commercial banks. In Russian practice, along with the term discount rate for this situation, the term is used refinancing rate. The higher the discount rate of the Central Bank, the higher the percentage then charged by commercial banks for the loan they provide to their customers and vice versa.

The discount rate is understood as the percentage, the rate charged by the bank from the amount of the bill when « bill accounting» (purchased by the bank before the due date). In fact, the discount rate in this case is the price charged for acquiring the liability before it falls due. When accounting for government securities by the Central Bank or providing a loan secured by them, the term official discount rate is used.

Discount rate lending means that commercial banks and other depository institutions have the right to borrow reserves from the Central Bank at a discount rate. This rate is usually set below the short-term capital market rates (Treasury bills). This allows institutions to change the terms of lending (that is, the amount of money they can lend out), thus affecting the money supply.

Simple, compound and nominal discount rate Simple discount rate

When accounting for simple discount rate, the discount is taken in relation to the total amount of the obligation and represents the same amount each time. In other words,

Compound discount rate

When accounting for difficult the discount rate, the amount of the payment is calculated by the formula:

(with the same notation).

Nominal discount rate

When accounting for nominal discount rate, which is charged once a year, the amount of payment in years is calculated by the formula:

.

The discount rate is perhaps the most important factor in determining the price of a currency. Therefore, it is extremely important to be aware of the monetary policy (discount rate decisions) of the Central Bank of the country whose currency you are working with.

The main factors influencing the decision of the Central Bank regarding discount rates is price stability or inflation.

Inflation is a constant increase in the prices of goods and services.

It is inflation that is the reason that you pay 100 rubles per kilogram of sausage, although 20 years ago you paid 20 times less.

It is generally recognized that moderate inflation is an indispensable component of economic growth.

However, too high inflation can destroy the economy, which is why Central Banks around the world constantly monitor indicators such as CPI (Consumer Price Index), PCE (Personal Consumption Index).

In an attempt to contain inflation, Central banks most often raise interest rates, which leads to lower inflation and slower economic growth.

This situation arises for the simple reason that raising interest rates causes consumers and businesses to save money and reduce borrowing, which leads to a decrease in economic activity and putting money under the mattress.

On the other hand, a decrease in discount rates leads to the fact that the level of loans, both from consumers and from commercial structures, grows (as banks reduce the level of requirements for the borrower), which, in turn, leads to an increase in costs, thus contributing to economic growth.

How this can affect the foreign exchange market:

Exchange rates directly depend on the size of discount rates for the reason that the inflow or outflow of foreign investment into the country depends on their level. Discount rates are the main factor determining the attractiveness of the economy for investors (based on the size of the discount rate, the investor determines whether he should invest in the economy of a given country).

If you were offered to put money into a savings account at 1% and at 0.25%, which would you choose? You would choose the offer to put money at 1%, since 1% is more than 0.25%. The same thing happens with currency!

The higher the discount rate in a country, the stronger its currency, and vice versa, in countries with a low discount rate, the currency weakens.

The main thing to remember is that the level of the discount rate within the country has a direct impact on the interest of investors and, as a result, on the price of the local currency on the international market.

The situation in the markets is constantly changing depending on the ongoing events and all kinds of situations. The same thing happens with discount rates, they also change, but not so often.

Most forex traders don't pay much attention to current interest rates as they are often reflected in the price of the currency. The more important question is where discount rates will go next.

It is also important to know how monetary policy affects interest rates or, more precisely, how interest rates will change at the end of the monetary cycle.

If interest rates fall for a long enough period, it means that they are bound to rise soon.

The market will tell them. They have animal instincts. The change in expectations is a signal that when the time for changing interest rates comes up, speculation will get a new impetus.

Although, most often, discount rates change gradually, depending on changes in monetary policy, even a simple report can affect the “mood” of the market.

This leads to the fact that discount rates change more sharply than previously expected, and even begin to move in the opposite direction.

Discrepancy in discount rates.

Take any currency pair.

When deciding whether a currency will appreciate or weaken, many currency traders use the technique of comparing the discount rates of one country issuing one currency of a given currency pair with the discount rates of a country issuing another currency of this currency pair.

The difference between these discount rates, i.e. the difference in interest rates is the first thing you should pay attention to. Such discrepancies will help you identify changes in the currency you are interested in that are difficult to notice on a superficial examination.

An increase in interest rate divergence usually has a positive effect on a stronger currency, while a decrease in the divergence has a positive effect on a weaker currency.

Cases where the discount rates of a currency pair move in opposite directions often result in a huge swing.

The moment when discount rates for one of the currencies of a currency pair are rising and the other is falling is the perfect time for sharp swings.

Nominal and real rates.

The nominal discount rate is calculated taking into account the expected inflation, as a result of which it often does not coincide with the real one.

Real discount rate = nominal discount rate - expected inflation

The nominal rate is the base rate that can be observed (i.e. interest on bonds).