What is Market Rate of Return?

//What is Market Rate of Return?
What is Market Rate of Return? 2017-10-05T22:12:10+00:00

Definition: Market rate or the going rate is the rate of interest that is readily accepted by borrows and lenders based on the risk level of the transaction. In other words, the market rate is the standard interest accepted in an industry for a specific type of transaction.

What Does Market Rate of Return Mean?

Since interest rates depend on market and economy conditions, risk, and desired rate of return, interest rate tend to fluctuate over time and among industries.

Many times the market rate is influenced by the Federal Reserve’s prime interest rate because this is the rate that banks and other institutions can borrow money at.

Example

The market rate is usually influenced by supply, demand, and risk. Take bonds for example. When a company or local municipality decides to issue a bond, it prints the market rate of interest on the face of the bond called the coupon rate or stated rate of interest. Since it can take several months for the bonds to be printed and sold to the public, the market rate of interest can change making the stated rate and the market rate different. This is why bonds sell at a premium or a discount.

The market rate can change because of economy factors, inflation, or even risk. For instance, the market rate for auto loans is different than the market rate for building loans. This is because each of these transactions carries a different amount of risk. Banks and lenders require a higher interest rate of return on riskier loans.

Remember, the market rate of interest is the general going rate in an industry. In other words, it’s a broad average interest rate that lenders are willing to accept and borrowers are willing to pay for a specific transaction.