Variable interest rate
A variable-rate loan or investment has interest that can change over time. Many contracts specify a benchmark plus a margin and reset at defined intervals, but floors, caps, fees and alternative pricing terms can alter the result. Borrowers face higher cash interest if the relevant rate rises, while investors can earn less if it falls. A change in a benchmark does not necessarily change the contractual rate immediately or by exactly the same amount. Compare the full contract with fixed-rate alternatives and any hedge.
Worked example
A loan charges three-month EURIBOR plus 2 percentage points. At a reset when the reference is 3%, the annualised contractual rate becomes 5% for the specified interest period, subject to day-count and other terms.
Common mistake
Assuming a floating rate resets daily regardless of contract terms or remains fixed for the entire loan life.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |