Financial Futures
When you take out a mortgage, apply for college loans, or finance a new car, your lender determines the rate of interest you’ll be charged for a portion of, or for the duration of your loan. This rate is heavily influenced by the overall economy’s interest rates. Interest rate futures enable banks to manage the risk of fluctuating interest rates — so they can loan money to businesses in your community and to people like you.
What is interest rate risk?
When a bank loans you money, it must pay an interest rate back to the Federal Reserve Bank, the central banking system of the United States. Think of it like this: if the bank is your lender, then the Fed is the bank’s lender. Since these interest rates move all the time, the bank is constantly exposed to price risks that will shape how much money it loans out, and at what rate.
See how banks use interest rate futures to manage risk.
How does all this impact me?
Mortgage rates rise and fall along with interest rates. When banks use interest rate futures to manage their interest rate exposure, they are better able to provide you with a competitive mortgage rate because they’ve already locked in their own short- or long-term interest rate. Managing their risk with interest rate futures enables them to loan more money to more people and businesses.
See how interest rate futures affect your everyday life in many ways.
How interest rate futures impact your everyday life
Interest rate futures play a huge role in our economy, enabling people to buy homes, grow their savings and finance needed purchases. Chances are good that you’ve already benefited from them — or will at some point in your life.
Learn how
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When buying a home
One of the most popular types of mortgages is called a “fixed rate” mortgage. This means your interest rate for the loan never changes because the bank has locked it in by using interest rate futures.
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When opening a savings account
Parents often open savings accounts or buy CDs for their children, and they earn interest. Banks are able to offer you competitive rates for these types of accounts because they use interest rate futures to manage interest rate fluctuations.
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When taking out a student loan
The total amount you pay for a college loan is affected by its interest rate. Your bank uses interest rate futures to protect against rate fluctuations and to provide you with a competitive offer for your loan.
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When financing a car
When you take out a car loan, you’re really agreeing to the interest rate offered by the lender. The lender uses interest rate futures to manage the risk of interest rate fluctuations and offer you a competitive loan.
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Additional Resource
The following resource is from Econ Essentials, created in partnership with Discovery Education.
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