Variable Rate
Variable Rate Meaning:
In deposit terminology, the term Variable Rate refers to any type of deposit account which does not pay its holder a fixed interest rate. The level of the Variable Rate paid is often based on a benchmark interest rate such as the prime rate in the United States or another money market index like LIBOR.
In deposit terminology, the term Variable Rate refers to any type of deposit account which does not pay its holder a fixed interest rate. The level of the Variable Rate paid is often based on a benchmark interest rate such as the prime rate in the United States or another money market index like LIBOR.
For example, the Variable Rate of interest paid on a deposit account will often be tied to another benchmark interest rate such as the prime rate in the United States. If the prime rate is at 3.25% and a bank customer is making a Variable Rate deposit of $100,000 at two percentage points below the prime rate, this would mean that they would receive an effective interest rate of 1.25% on the deposit while the prime rate remained at 3.25%. If the prime rate then rose to 4% after 6 months, the bank customer would then receive 2% on the same loan. Also, if in the second year of the Variable Rate deposit, the Prime Rate fell to 3.75%, this would reduce the Variable Rate of interest on the deposit to 1.75%.