# Interest Rate Derivative Definition.

An interest rate derivative is a financial contract whose value is derived from the performance of an underlying interest rate instrument. The most common type of interest rate derivative is a swap, which is a contractual agreement between two counterparties to exchange periodic payments based on different interest rate indices.

##### What are the 5 derivatives?

1. The first derivative is the change in the interest rate with respect to time.

2. The second derivative is the change in the first derivative with respect to time.

3. The third derivative is the change in the second derivative with respect to time.

4. The fourth derivative is the change in the third derivative with respect to time.

5. The fifth derivative is the change in the fourth derivative with respect to time.

What are the 4 main types of derivatives? 1. Interest rate swaps: Two parties agree to exchange periodic interest payments on a given principal amount. The payments are based on different interest rate indices, such as the London Interbank Offered Rate (LIBOR).

2. Forward rate agreements: Two parties agree to enter into a loan agreement at a future date, at an interest rate that is agreed upon today.

3. Cap agreements: Two parties agree to exchange periodic payments, where the payments are linked to an underlying interest rate. If the interest rate exceeds a certain level, the buyer of the cap agreement will receive a payment from the seller.

4. Collar agreements: Two parties agree to exchange periodic payments, where the payments are linked to an underlying interest rate. If the interest rate falls below a certain level, the buyer of the collar agreement will make a payment to the seller. What are the 4 types of interest? There are four types of interest: simple interest, compound interest, amortized interest, and precomputed interest.

1. Simple interest is the interest that accrues on a loan or financial product without taking into account the compounding of interest. This means that simple interest is calculated only on the principal amount of the loan.

2. Compound interest is the interest that accrues on a loan or financial product taking into account the compounding of interest. This means that compound interest is calculated on the principal amount of the loan as well as on the accumulated interest.

3. Amortized interest is the interest that is paid on a loan or financial product over the life of the loan. This type of interest is usually paid in equal installments along with the principal amount of the loan.

4. Precomputed interest is the interest that is calculated in advance and is usually paid in a lump sum at the time of loan disbursement. What are the four components of interest rates? The four components of interest rates are the real rate, the nominal rate, the inflation rate, and the risk-free rate. What is interest rate term? An interest rate term is the length of time over which an interest rate applies. For example, a five-year interest rate term means that the interest rate applies for five years.