ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: What Determines Lease Rates??

Thursday, December 18, 2008

What Determines Lease Rates??

Lease rates are often determined by two things that most people are not aware of. Those two things are 3 and 5 Year Treasury Rates and 3 and 5 Year Treasury Interest Rate Swaps.

3 and 5 year Treasuries are something many people are aware of. They are bonds issued by the Federal Government with a 3 or 5 year period until maturity, when the repayment of principal occurs. Interest payments are made in the interim on a quarterly or annual basis. They are the basis for some lease rates because the average lease period is 3-5 years.

An Interest Rate Swap is An exchange of interest payments on a specific principal amount. This is a counterparty agreement, and so can be standardized to the requirements of the parties involved. An interest rate swap usually involves just two parties, but occasionally involves more. Often, an interest rate swap involves exchanging a fixed amount per payment period for a payment that is not fixed (the floating side of the swap would usually be linked to another interest rate, often the LIBOR). In an interest rate swap, the principal amount is never exchanged, it is just a notional principal amount. Also, on a payment date, it is normally the case that only the difference between the two payment amounts is turned over to the party that is entitled to it, as opposed to exchanging the full interest amounts. Thus, an interest rate swap usually involves very little cash outlay.

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