Fixed Rate Debt

Fixed Rate debt refers to a form of financing where the interest rate used to calculate the interest due in each period is constant (i.e. does not change). This is in contrast to Floating Rate debt, where the interest rate does change periodically.

The interest rate on a Fixed Rate loan is set (i.e. locked) upon origination of the loan. The interest rate is generally determined by taking some benchmark rate (e.g. Government bonds), and adding a premium to that rate to arrive at the fixed annual interest rate.

So for instance, imagine a lender is pricing a 10-yr fixed rate loan using the 10-yr UST as the benchmark. Furthermore, imagine the lender quotes the rate at 150 bps over the 10-yr UST. At the time of the rate lock, the lender will take the yield on the 10-yr UST at that moment (e.g. 1.60%) and will add the agreed upon premium (e.g. 150 bps or 1.50%) to arrive at the fixed interest rate (e.g. 1.60% + 1.50% = 3.10%).

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