Indexing Close
Indexing is a process of adjusting amounts periodically to reflect an increase in the inflation rate. The IRS frequently indexes dollar amounts for tax brackets, retirement account contributions, and tax deduction income phase out amounts. Indexing is also a process of determining loan interest rates. It involves setting an interest rate to a base rate, usually a widely quoted market rate such as the yield on U.S. Treasury bills, LIBOR, or the U.S. prime rate. Indexing allows a lender and borrower to share the risk of changes in the base rate. The base rate is reset occasionally, such as on a specific date every year or other interval. The amount added to the base rate is called the margin, or spread.