EURIBOR and Effective annual rate: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Add link to CET page.)
 
imported>Doug Williamson
(Add subheadings.)
 
Line 1: Line 1:
(Euro Interbank Offered Rate)
(EAR).


Sponsored by the European Banking Federation ([http://www.euribor-ebf.eu/ EBF]),  EURIBOR® is a formal benchmark or reference interest rate since 30 December 1998.
__TOC__


It estimates the all-in, simple interest rate (including credit premium and liquidity premium) at which euro denominated interbank term deposits for spot value (T+2) are offered within the euro-zone by one prime bank to another prime bank in the period before 10.45 [[CET]] each business morning.
1.  
EURIBOR is calculated for periods ranging from one day to one year. It is quoted to three decimal places and on an actual/360 day-count.


==Contributing rate estimates==
A quoting convention under which interest at the quoted rate is calculated and added to the principal annually.


The panel of banks contributing to Euribor is (September 2013) made up of 32 banks though it has been larger in the past.
EAR is the most usual conventional quotation basis for instruments with maturities of greater than one year.


The banks submit their estimate, to two decimal places, of the rate "at which euro interbank term deposits are being offered within the Eurozone by one prime bank to another at 11.00 a.m. Brussels time ("the best price between the best banks")". This is similar to the question for [[LIBOR]] contributing banks prior to reform of LIBOR in 1998 to improve accountability of contributing banks for the submitted rate.


The EBF publish a [http://www.euribor-ebf.eu/assets/files/Euribor_code_conduct.pdf code of conduct] for contributing banks
2.  


==Euribor calculation==
A conventional measure which expresses the returns on different instruments on a comparable basis.


In calculating the Euribor from the submitted rates, the highest and lowest 15% of submitted rates are ignored and the central 70% remaining is averaged and published to 3 decimal places.
The EAR basis of comparison is the ''equivalent'' rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review.


Thomson Reuters is the screen service provider responsible for computing and also publishing Euribor.
For this reason, 'EAR' is sometimes expressed as <u>equivalent</u> annual rate.


The Euribor process is overseen by a [http://www.euribor-ebf.eu/euribor-org/steering-committee.html Steering Committee].
 
==Conversion formulae==
 
====Nominal annual rate to periodic rate====
 
r = R / n
 
 
''Where:''
 
r = periodic interest rate or yield
 
R = nominal annual rate
 
n = number of times the period fits into a conventional year (for example, 360 or 365 days)
 
 
====Periodic interest rate or yield to Effective annual rate====
 
EAR = (1 + r)<sup>n</sup> - 1
 
 
''Where:''
 
EAR = effective annual rate or yield
 
r = periodic interest rate or yield, as before
 
n = number of times the period fits into a calendar year
 
 
==Calculating EAR from GBP overnight quote==
 
<span style="color:#4B0082">'''Example: EAR from overnight quote'''</span>
 
GBP overnight interest is conventionally quoted on a simple interest basis for a 365-day year.
 
So GBP overnight interest quoted at R = 5.11% means:
 
(i)
 
Interest of:
 
r = R / n
 
r = 5.11% / 365
 
r = 0.014% (= 0.00014) is paid per day.
 
 
(ii)
 
The ''equivalent'' effective annual rate is calculated from (1 + r).
 
1 + r = 1 + 0.00014 = 1.00014
 
 
EAR = (1 + r)<sup>n</sup> - 1
 
EAR = 1.00014<sup>365</sup> - 1
 
EAR = '''5.2424%'''.




== See also ==
== See also ==
* [[Benchmark]]
* [[ACT/365 fixed]]
* [[EONIA]]
* [[Annual effective rate]]
* [[InterBank Offered Rate]]
* [[Annual effective yield]]
* [[Annual percentage rate]]
* [[Calculating effective annual rates]]
* [[Capital market]]
* [[Certificate in Treasury Fundamentals]]
* [[Certificate in Treasury]]
* [[Continuously compounded rate of return]]
* [[Effective annual yield]]
* [[Equivalent Annual Rate]]
* [[LIBOR]]
* [[LIBOR]]
* [[TIBOR]]
* [[Nominal annual rate]]
 
* [[Periodic discount rate]]
[[Category:Interest_Rate_Risk]]
* [[Periodic rate of interest]]
* [[Periodic yield]]
* [[Rate of return]]
* [[Real]]
* [[Return]]
* [[Semi-annual rate]]

Revision as of 10:49, 4 December 2015

(EAR).

1.

A quoting convention under which interest at the quoted rate is calculated and added to the principal annually.

EAR is the most usual conventional quotation basis for instruments with maturities of greater than one year.


2.

A conventional measure which expresses the returns on different instruments on a comparable basis.

The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review.

For this reason, 'EAR' is sometimes expressed as equivalent annual rate.


Conversion formulae

Nominal annual rate to periodic rate

r = R / n


Where:

r = periodic interest rate or yield

R = nominal annual rate

n = number of times the period fits into a conventional year (for example, 360 or 365 days)


Periodic interest rate or yield to Effective annual rate

EAR = (1 + r)n - 1


Where:

EAR = effective annual rate or yield

r = periodic interest rate or yield, as before

n = number of times the period fits into a calendar year


Calculating EAR from GBP overnight quote

Example: EAR from overnight quote

GBP overnight interest is conventionally quoted on a simple interest basis for a 365-day year.

So GBP overnight interest quoted at R = 5.11% means:

(i)

Interest of:

r = R / n

r = 5.11% / 365

r = 0.014% (= 0.00014) is paid per day.


(ii)

The equivalent effective annual rate is calculated from (1 + r).

1 + r = 1 + 0.00014 = 1.00014


EAR = (1 + r)n - 1

EAR = 1.00014365 - 1

EAR = 5.2424%.


See also

Retrieved from ‘https://wiki.treasurers.org/w/index.php?title=EURIBOR&oldid=17304’