Understanding Euribor, Interest, and Capital

Euribor

Euribor, an acronym for European Interbank Offered Rate, or European interbank offered rate, is the interest rate applied to transactions between banks in Europe. It represents the percentage rate a bank pays when another bank lends it money. This index is computed from the offer prices of the loans made to each of 64 major European banks. For example, 1.243%.

Simple and Compound Interest

• Simple: Characterized by the interest generated in each time period not accumulating to the capital. Consequently, the interest for the next period is always calculated on the initial capital.
• Compound: Characterized by the interest generated in each period being accumulated to the capital prior to calculating interest for the following period.

Discounting Bills of Exchange

A discount is a bank loan or credit provided by a financial institution. The institution delivers the amount of a bill of exchange that has not yet expired, less any deductions (interest) and relevant commissions. The recipient of the bill (endorser) receives the funds for collection at the time of maturity.

To carry out the discount of an effect, the bank or savings bank conducts a customer solvency survey to determine a maximum discount. In addition, both the endorser and the drawer should be free from any suspicion of insolvency. In some cases, financial institutions may seek collateral when granting discounts on bills of exchange.

The client of the bank maintains their duties until the financial institution recovers the effect. If the bill is unpaid, the bank shall return it, reimbursing the drawer the amount of the refund plus expenses.

Capital Equivalence

When the present value of capital equals the present value of one or more other funds, they are considered financially equivalent.

Common and Average Maturity

• Common Maturity: The time or date when the replacement is made whole by a single capital.
• Average Maturity: When the nominal amount of capital to be replaced equals the nominal capital which it replaces. Average maturity, therefore, is a special case of common due date.

Capital Equivalence (Repeated)

When the present value of capital equals the present value of one or more other funds, they are considered financially equivalent.

Common and Average Maturity (Repeated)

• Common Maturity: The time or date when the replacement is made whole by a single capital.
• Average Maturity: When the nominal amount of capital to be replaced equals the nominal capital which it replaces. Average maturity, therefore, is a special case of common due date.

Relationship Between Time and Interest Rate

The interest rate and time must be referred to in the same units of time.