Match-Rate Funds

What Are Match-Rate Funds?

Match rate funds are loan funds which have their interest rates matched (or incredibly close) to the interest rate on the source of the funds loaned out. This term is particularly utilized in the European banking system to depict the relationship between the deposits a bank is presently holding and its outstanding loans.

Understanding Match-Rate Funds

Match rate funds are better perceived with the lending system carried out by banks. At the point when account holders put aside cash installments in their accounts, the bank changes over this cash into loans that are made out to borrowers. To repay account holders for the deposit, the bank pays a interest rate on the funds in the account. The funds are loaned to corporate or individual borrowers who pay interest to the bank until the whole loan amount is repaid. The difference between the interest rate paid to depositors and the rate paid to borrowers is the spread that addresses the bank's profit. At the point when the interest rates on the money received and loaned out are closely matched, the money is alluded to as a match rate fund.

Illustration of a Match-Rate Fund

We should expect that a bank accepted a $100,000 deposit and agreed to pay 2% interest on it for a considerable length of time. Then, at that point, the bank loaned that $100,000 out at a rate of 2.05%. Since the spread between the two rates is almost zero, it's called a match-rate fund.

A securitization lender would be a regular client of match-rate funds. The lender might buy loans from the secondary mortgage market. The interest rate on these loans will be paid to the lender/buyer who will continue to package the loans to sell as securities to different investors. These loans would probably be match-rate funds as the rate the lender gets from the seller and the rate it provides for its buyer will be closely matched.

Match-rate funds regularly accompany extremely high penalty fees for early prepayment on the grounds that the intermediary has agreed to pay a specific interest rate to the depositor. On the off chance that prepayment was not discouraged, the intermediary could wind up paying interest after it had stopped getting interest payments.