Adjustment Frequency
You own an adjustable rate mortgage. It stipulates that you'll pay LIBOR plus one percent, or one hundred basis points. Your first six months are guaranteed to be at 4% max interest rate. After that, the rate adjusts every six months, such that no adjustment can be more than 25 basis points.
Inflation grabs hold of the planet and LIBOR skyrockets, going from 3% to 7% almost overnight. Luckily for you, you have an adjustment frequency tax of 25 basis every three months, so that next quarter you'll pay 4.25%, and the following quarter 4.5%, and the following quarter 4.75%, and so on...until eventually, years down the line, you catch up to the very expensive 8% interest you'll owe with LIBOR having settled in at 7%.
Adjustment frequencies are a core element of adjustable rate mortgages so that borrowers don't feel the rocking shocks of a volatile financial world where the cost of renting money is dancing around like a cat on a hot tin roof.
Related or Semi-related Video
Finance: What Is a Basis Point?124 Views
finance a la shmoop what is a basis point?
well one percentage point is a hundred basis points, half a percentage is 50
basis points, five percentage points is? yeah we're gonna make you do that one on [frowning man talks to camera]
your own. well the basic idea is that in very large financial transactions those
involved need highly granular computation grids, and basis points
divid interest rates much more tightly. if a company borrows three billion
dollars just noting that the rate is four percent is really vague. it would
need to be noted as four point zero zero percent. why? because just one basis point [equation on screen]
i.e. one hundredth of a percent per year on three billion dollars borrowed
is still a lot of money. that is one basis point on three billion bucks is
300 grand .so basis points are a real thing in high finance transactions and [smiling man talk to camera]
okay okay the answer is 500 basis points. yeah all right now you can go back to
spinning this thingy. [man spins fidget spinner]
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