Legal Definitions - contract rate

Definition: The contract rate refers to the interest rate specified in a loan agreement or a bond contract. It is the rate at which the borrower agrees to pay interest to the lender over the life of the loan or bond.

Example: If a borrower takes out a $10,000 loan with a contract rate of 5%, they will be required to pay $500 in interest each year until the loan is fully repaid.

The example illustrates how the contract rate is the agreed-upon interest rate between the borrower and lender. It is important to note that the contract rate may differ from the market interest rate, which is the prevailing rate for similar loans or bonds at the time of issuance. The contract rate is typically based on factors such as the borrower's creditworthiness, the length of the loan or bond, and the prevailing market conditions at the time of negotiation.