Spread/margin for fixed interest rate instruments

Question

Could you clarify which instruments are reported as fixed interest rate and which ones as variable and whether the margin/spread that is added to the reference rate to account for the applied interest rate is reported for fixed interest loans?

Answer

Instruments with an interest rate that is predefined for certain periods during the life of the exposure on the basis of a reference interest rate (e.g. EURIBOR or LIBOR) on specific dates (known as fixing dates) is classified as an instrument with a variable interest rate. The key determinant is the fact that, in the case of variable interest rate instruments, at the date of inception, neither the creditor nor the debtor know the value of interest payments during the entire life of the instrument.

Conversely, only instruments with an interest rate that is known to both the creditor and the debtor at the date of inception, or that can be revised periodically where the future interest rates are known to both the creditor and the debtor at the date of inception, are classified as having a fixed interest rate.

Finally, instruments which have both a fixed and a variable interest rate over their life are classified as mixed.

For example, the data attribute “interest rate type” is reported as “variable” for a loan where: in the first year an interest rate of 2.7% will be charged (where the rate is calculated by taking the 12-month EURIBOR on a fixed date, say 1 November, increased by a spread of 2.4%); thereafter, the interest rate will be reset on the first day of every year (following the same EURIBOR formula). This is based on the fact that although the interest rate charged in a given year during the life of the instrument is fixed, the future rates are not known to the parties at the date of inception of the instrument.

Consequently, it is clarified that the data attributes “reference rate” and “interest rate spread/margin” do not apply in cases where the interest rate type is fixed. This is in line with Part II of the Manual (page 48, lines 21-22).

Media contacts