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Advait Pandey

Short Term Interest rates are those which are levied on loans or debt instruments having a maturity of less than one year. These debt instruments could be

• Treasury Bills
• Certificate of Deposit (CD)
• Commercial Paper
• Loans between Security dealers

Interest rates and Repurchasing Agreements

Short Term Interest Rates generally play a major role in Repurchasing Agreements or repos. Investment banks and security dealers are expected to keep a certain amount of capital as a liquidity requirement. To ensure this, they reach an agreement of a "repo" or a secured loan with short term lenders based on a certain interest, most commonly used are the Federal funds rate or the various LIBOR rates.

Central banks and the Interest Rates

When demand for short term credit increases, so do the interest rates. In order to provide a stimulus, the Fed and Central banks counteract such increases by purchasing government securities. This can be done by various open market operations employed by the Central banks.

One of the more common methods involves, maintaining the interest rate, such as the Federal funds rate (US.FED-G). They do so by writing checks to commercial banks, which in turn the banks can use to increase their cash reserves. Such open market operations have been instrumental in maintaining the interest rate level in the short term.

Other Short Term Interest Rates

Other major short term interest rate transactions involve a certificate of deposit and commercial paper amongst others. Certificate of deposits involve guaranteeing a specified rate of return in exchange for the depositor committing for an understood period of time.

A commercial paper involves short-term debt security or promissory note issued by large corporations in order to meet short term obligations.

References