The borrowing of money at a low interest in order to invest in a security or investment that provides a higher interest. For example, an investor believing that short-term interest rates will remain low might take out short-term debt to finance the purchase of long-term debt. The return on the investment would be the coupon of the long-term debt minus the cost of short-term borrowing. If the price of the long-term debt fell due to rising interest rates the investment becomes less profitable. As another example, a currency carry trade could involve an investor borrowing New Zealand dollars, which could have a low interest rate, to purchase a U.S. dollar-denominated investment, which might have a high interest rate. If the interest rate on the investment declines, or if the exchange rate on the New Zealand dollar becomes unfavorable, the investor could lose money.

Copyright©2009 by InvestorWords.com. ALL RIGHTS RESERVED.

Reproduction of all or part of this glossary and/or this page, in any format, without written consent is prohibited. If you have questions about this dictionary please feel free to contact us feedback\@\investorguide.com