The Current Value of Funds Rate (CVFR) is the rate that the United States Federal Government charges people and organizations that owe it money and are late in paying. The rate is also used when considering whether to offer discounts for early payment. The Current Value of Funds Rate ultimately derives from the Fed Funds rate, which is set by the Federal Reserve.
The main purpose of the CVFR is to act as a standard interest rate for overdue payments to federal agencies. Until its introduction in 1978, each agency set its own rate, which could cause confusion and, arguably, unfairness. The CVFR takes effect once a payment becomes overdue, and continues to be charged until the outstanding payment is made in full. The interest rate charged on a particular debt is fixed at the CVFR level that applies when the payment first becomes overdue and doesn't change even if the CVFR itself changes later on.
Unlike interest charged on most loans, interest applied with the Current Value of Funds Rate is simple, rather than compound, interest. This means that each interest charge is based only on the original debt and does not take account of previous interest charges. This makes the total interest paid by the debtor lower than it would be with compound interest.
The CVFR is also used by federal agencies when offering cash discounts. "Cash" in this context means immediate payment, rather than the actual method used to pay. A federal agency may allow a customer to get a discount for paying immediately, rather than being allowed the agency's usual period before payment becomes due. This discount is effectively worked out by applying the CVFR in reverse: that is, taking into account the CVFR, the balance and how early the payment is, and then taking the relevant amount off the balance as a discount rather than adding it as interest.
The Current Value of Funds Rate is based on the Treasury Tax and Loan Rate (TTLR). Each year, the CVFR is set by taking the TTLR in the 12 months ending on 30 September and then rounding it to the nearest percent. Normally, this CVFR then applies for the following 12 months, though there is a possible exception. At the end of every quarter, the TTLR for the latest 12 month period is reviewed. If this figure would cause the associated CVFR to change by more than two percentage points, the CVFR is changed; otherwise it is left the same until the next 30 September review.
The Treasury Tax and Loan Rate is used for a scheme in which the Treasury takes money paid by banks in taxes and lends it to other banks. This is designed to increase liquidity in the banking system. The TTLR is calculated by deducting 0.25 percentage points from the prevailing Federal Funds rate. This is the rate set by the Federal Reserve that is designed to influence the general price and availability of credit across the financial system.
