The base interest rate is the minimum interest rate which investors will consider when they are investing in non-Treasury securities. This interest rate is usually closely associated with the interest rate offered on recently released and comparable Treasury securities, although a small premium is added on to compensate for the riskier investment which non-Treasury securities represent. Because interest rates can fluctuate rapidly, this rate can also change quickly, and most investors try to be aware of the going interest rate on Treasury securities so that they can make sound financial decisions.
A Treasury security is a type of bond issued by the United States government. The government uses these securities to raise money, and investors are offered interest on their securities to encourage them to essentially loan the government money. A Treasury security is considered risk-free, since it is backed by the authority of the United States Treasury. These securities represent safe investments for people who prefer to be cautious about their money.
Securities such as stocks and bonds issued by authorities other than the United States Treasury, however, are not risk-free, because the Treasury does not back them. Because of the added riskiness, the interest rates on these securities are made more appealing, encouraging investors to consider them as part of their portfolios. When deciding on an interest rate to offer, the Treasury's current rate is considered and increased slightly, creating a higher yield on a somewhat riskier investment. This is known as the base interest rate; investors will not generally purchase securities which are offered below the base interest rate.
Investors can profit from securities purchased at the base interest rate, as long as the securities remain good. Sometimes, it is possible to turn a quick profit with these more risky investments. Just as is the case with Treasury securities, the maturity on bonds may vary widely, from a short term period like 60 days to a more long term period such a year or more. The base interest rate also fluctuates depending on the length of maturity.
In some regions, the base interest rate may also be known as the benchmark interest rate. Since numerous rates may be available at the same time, investors and financial analysts need to be on their toes. By keeping track of trends in the market, these individuals can assure themselves that they are making decisions on the basis of the most recent and relevant information.