One-Year CMT (Monthly)

What it means: An index published by the Federal Reserve Board based on the monthly average yield of a range of Treasury securities, all adjusted to the equivalent of a one-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.

How it's used: It's an index that is used to set the cost of variable-rate loans, particularly adjustable-rate mortgages (ARMs). Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Since this index is a monthly average of the one-year CMT yield, it is less volatile than daily interest rate movements but more volatile than other indexes such as the 11th District Cost of Funds.

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