Interest Rate Differential (Ird) Definition

An interest rate differential (IRD) is the difference in the interest rates of two financial instruments. The most common use of an IRD is to compare the interest rate on a fixed-rate loan with the interest rate on a floating-rate loan.

A typical example would be a bank comparing the interest rates on its deposits with the rates it must pay for loans. If the bank’s cost of funds is higher than the average lending rate, then the bank will have a negative IRD. The opposite is true if the bank’s cost of funds is lower than the average lending rate.

The size of an IRD can have a significant impact on a bank’s profitability. A large positive IRD allows a bank to earn more profits on its loans than it pays out on its deposits. A large negative IRD, on the other hand, eats into profits.