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Loan Indexes



There are many possible loan indexes. Some are listed below. Each one has distinct market characteristics and fluctuates differently. The most common indexes are:






Constant Maturity Treasury (CMT or TCM)


These indexes are the weekly or monthly average yields on U.S. Treasury securities adjusted to constant maturities.

Constant Maturity Treasuries is a set of "theoretical" securities based on the most recently auctioned "real" securities: 1-, 3-, 6-month bills, 2-, 3-, 5-, 10-, 30-year notes, and also the 'off-the-runs' in the 7- to 20-year maturity range. The Constant Maturity Treasury rates are also known as "Treasury Yield Curve Rates".

Yields on Treasury securities at "constant maturity" are interpolated by the U.S. Treasury from the daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

The CMT indexes are volatile and move with the market. They reflect the state of the economy, and respond quickly to economic changes. These indexes react more quickly than the COFI index or the MTA index.


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Treasury Bill (T-Bill)

These indexes are based on the results of auctions that the U.S. Treasury holds for its Treasury bills, notes and bonds.

Treasury bills are issued by the U.S. government with maturities of 1, 3 and 6 months (4-week, 13-week, 26-week bills or 28-day, 91-day, 182-day bills) in order to pay for the national debt and other expenses. The 3- and 6-month Treasury bills are auctioned every Monday and the resulting figures are released to the public the next day. Treasury bill auction results provide the discount rate*, investment yield, and price for recently auctioned bills.

* The discount rate is an annualized rate of return based on the par value of the bills and is calculated on a 360-day basis. The investment yield, or coupon-equivalent yield, is calculated on a 365-day basis and is an annualized rate based on the purchase price of the bills and reflects the actual yield to maturity.

T-Bill indexes have both weekly and monthly values. Monthly values are averages of the past month's weekly T-Bill rates.

The Treasury Bill indexes move with the market and respond quickly to economic changes like the CMT indexes.




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12-month Treasury Average (MTA or MAT)

The Monthly Treasury Average, also known as 12-Month Moving Average Treasury index (MAT) is a relatively new ARM index. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT.

 Because this index is an annual average, it is steadier than the 1-Year CMT index. The MTA and CODI indexes generally fluctuate slightly more than the 11th District COFI.


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11th District Cost of Funds Index (COFI)

This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.

Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both up trend and downtrend movements. As a result, loans tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.

The 11th District Cost Of Funds Index is the slowest moving and most stable of all loan indexes. It smoothes out a lot of the volatility of the market.


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London Inter Bank Offering Rates (LIBOR)

London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euro market in terms of volume.

The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. The LIBOR compares most closely to the 1-Year CMT index and is more open to quick and wide fluctuations than the COFI rate.

There are several different LIBOR rates: 1-, 3-, 6-Month, and 1-Year LIBOR. The 6-Month LIBOR is the most common.

LIBOR-indexed loans offer borrowers aggressive initial rates and have proved to be competitive with such popular indexes as the 11th District Cost of Funds, the 6-Month Treasury Bill, and the 6-Month Certificate of Deposit. With the LIBOR indexed loans, borrowers are generally protected from wide fluctuations in interest rates by periodic and lifetime interest rate caps.


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Bank Prime Loan (Prime Rate)

The Prime Rate is the interest rate charged by banks for short-term loans to their most creditworthy customers whose credit standing is so high that little risk to the lender is involved. Only a small percentage of customers qualify for the prime rate, which tends to be the lowest going interest rate and thus serves as a basis for other, higher risk loans.

The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks at the same time. Although, the prime rate does not adjust on any regular basis. The prime rate is not very volatile index however it generally rises quickly but declines very slowly.

Many home-equity loans and lines of credit are tied to the prime rate as published in the Wall Street Journal. The Journal number is derived from the rate posted by at least 75 percent of the 30 largest U.S. banks.


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