Business Glossary

charging loan interest higher than the rates allowed by law. Interest rates in consumer credit contracts are controlled by state law, and the highest permitted rate is called the usury rate or the usury ceiling. Since the early 1980s, many state legislatures relaxed statutory controls on consumer credit because rather than protecting consumers from unscrupulous lenders, such controls often make it more difficult for consumers to obtain credit. To alleviate this, and to keep banks from moving their credit card operations to states with more liberal statutes, lawmakers revised state statutes to allow interest rates to be set by market competition, rather than specified by laws. Several states have abolished usury ceilings; most states have raised the interest ceilings to encourage more rate competition among financial institutions, and most of these laws have a sunset clause calling for periodic review every three to five years. Some states, including New York, Delaware, and South Dakota have no limits on consumer credit. New York does, however, have a criminal usury ceiling of 25%, a maximum rate of interest that lenders may charge on consumer credit.

State usury laws generally are enforceable only through civil suits filed by debtors claiming excessive interest charges. Most state laws have stiff penalties for illegal interest, ranging from forfeiture of interest owed on the entire loan balance, or forfeiture of both principal and interest. Commercial credit in most states is exempt from usury statutes; agricultural credit is unregulated, though not exempt from state interest rate controls.

cost of credit that consumers pay, expressed as a simple annual percentage. According to the federal Truth in Lending Act, every consumer loan agreement must disclose the APR in large bold type.

1. interest rate charged by banks to their best corporate customers in Great Britain. It is the British equivalent of the prime rate in the United States.
2. interest rate used as the basis for setting and adjusting rates described as adjustable, floating, or variable, usually the base or prime rate as defined above; a benchmark, such as an index or the 10-year Treasury note; or a money market rate, such as the rate on Treasury bills. See also Cost-Of-Funds Index (COFI).

<ol><li>maximum loan interest rate permitted by state law. An interest rate in excess of the legal rate is considered USURY; the penalties for charging excessive interest may include stiff fines or forfeiture of interest and/or principal.</li><li>rate of interest set by state law for legally enforceable claims, such as legal judgments and overdue taxes. This rate is rarely the highest rate allowed by law for any debt.</li></ol>

discount from par value at the time a bond or other debt instrument, such as a strip, is issued. (Although the par value of bonds is normally $1,000, $100 is used when traders quote prices.) A bond may be issued at $50 ($500) per bond instead of $100 ($1000), for example. The bond will mature at $100 (1,000), however, so that an investor has a built-in gain if the bond is held until maturity. The most extreme version of an original issue discount is a zero-coupon convertible security, which is originally sold at far below par value and pays no interest until it matures. The revenue reconciliation act of 1993 extended OID rules to include stripped preferred stock.

The tax treatment of original issue discount bonds is complex. The Internal Revenue Service assumes a certain rate of appreciation of the bond every year until maturity. No capital gain or loss will be incurred if the bond is sold for that estimated amount. But if the bond is sold for more than the assumed amount, a capital gains tax or a tax at the ordinary income rate is due.

savings bonds are exempt from OID rules.