Track 12 of 25

Rates and the policy cycle

How a policy rate reaches a borrowing cost, what a spread is, what a floating rate does month to month, and why a variable rate can move without a matching change in stated capacity.

25 lessons

Mark a lesson complete and it is remembered here.

What a policy rate is, and the one market it directly setsExactly one price is set by decision, and everything downstream of it is a consequence that arrives smaller than its cause.6 min
How a policy rate reaches an overnight funding marketThe rate is not commanded into place; it is bracketed by two standing offers, and arbitrage does the rest.6 min
From an overnight market to a term indexA one-month rate is built in one of two ways, and the choice decides whether your cost lags the cycle or leads it.7 min
What an index actually is, mechanicallyIt is the output of a published procedure run over other people's trades, not a quote, a forecast or an opinion.7 min
Which leg of index-plus-spread moves, and how oftenBoth legs can change, but one changes fourteen times to the other's once, and that asymmetry is most of the variation in a bill.7 min
What a spread is compensating forStrip out everything the index already tracks and what remains includes a wedge that widens exactly when funding is hardest.7 min
Reset cadence: the question that decides a rising monthOn a climbing path you are charged at the rate your agreement last looked up, not at the rate the market is quoting.7 min
Daily reset against monthly reset, on the same rate pathCadence does not make a facility dearer; it makes it late, and lateness is a saving in one direction only.7 min
Why a variable rate can move with no change in stated capacityTwo formulas share no symbol, which makes the numbers independent on the ledger and not independent in the world.7 min
What a rate change does to a balance that is capitalisingUnpaid interest joins the principal, so a rising path charges its highest rates against the largest balance it created.7 min
The yield curve as a set of prices, not a forecastEvery point on it is a rate someone will transact at today, which is why reading it as a prediction gets the arithmetic backwards.7 min
Why a short rate and a long rate move differentlyA ten-year rate is roughly an average of a hundred and twenty monthly rates, so one decision is diluted by a factor near a hundred.7 min
Inversion, mechanicallyA short rate above a long one is a solved equation about expected cuts, and it puts a short-funded borrower at the curve's dearest point.7 min
What is already priced into a rate, and what a surprise isDeliver a quarter-point cut into a market expecting three of them, and the borrower's accrual runs above what the forward number implied.7 min
Real and nominal, and why the distinction reaches collateralTwo routes to the same quoted rate leave your interest bill identical and your collateral value thirty-five percent apart.7 min
How a policy rate reaches an equity valuationThe chain has four links and the last one is a division, which is how one point at the short end takes a quarter off a share price.7 min
Why a higher discount rate compresses a long-duration asset moreThe same rate rise removes four percent from a cash flow two years out and thirty-six percent from one twenty years out.7 min
Duration as a sensitivity, applied outside bondsMeasure how far something fell per point of rate and you have the one number that converts a policy path into a headroom figure.7 min
The two-sided squeeze: cost rising while collateral fallsRaising the numerator and lowering the denominator costs more headroom together than the same two moves cost apart.7 min
Why the two arrive together rather than in sequenceNeither leg causes the other; both are functions of one number, and a shared input has no transmission delay to introduce.7 min
Rate cycles: how far and how long, described in shapeTwo cycles with an identical peak can differ by a factor of two and a half in cost, because the peak is one parameter of three.7 min
Lags: why the effect arrives after the decisionCollateral reprices on the expectation and cost reprices on the realisation, which puts the two legs on clocks weeks apart.7 min
What a lender's own funding cost does to your spreadIn a tightening both legs can rise, and the discretionary one is the small number nobody attributes correctly.7 min
One facility, one rate path, twenty-four monthsThe index came back to within a quarter point of where it started, and ten points of headroom did not come back with it.8 min
The rate is the term you can watch; the capacity is the one you cannotOne leg of the exposure was printed eighteen times and the other was printed never, and the unprinted one moved further.8 min

Educational only. Nothing in this track is investment, legal or tax advice, or a recommendation to enter into any transaction. Completion is stored in this browser and nowhere else.