Interest calculation method

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Under interest calculation methods means the individual variants of financial mathematics in the interest calculation . All methods are based on the classic interest formulas, they only differ in the calculation of the number of days (see also interest income ). There are a total of nine different methods that are scientifically recognized worldwide. Six of these methods are used in reality.

Methods and application

act is the abbreviation for English actual (German actually). In the first three of the following methods, the slash separates the assumption for the interest period from that for the base year; For example, “act / 360” stands for an interest period with calendar-specific days and a base year with an assumed 360 days.

act / 360 - Euro interest method, French interest method

  • The interest days are determined exactly to the calendar, so the interest year has 365 or 366 days.
  • The base year is set at 360 days regardless of the number of actual days.
  • With the euro interest rate method, the first day of investment earns interest, the last day of investment does not earn interest.
  • With the French interest rate method, no interest is paid on the first day of investment; interest is paid on the last day of investment.

This method is used in the euro area and Switzerland in the money market and when calculating mortgages .

act / 365 - English interest rate method

  • The interest days are determined exactly to the calendar, so the interest year has 365 or 366 days.
  • The base year is set at 365 days regardless of the number of actual days.
  • Interest is not paid on the first day of investment, interest is paid on the last day of investment.

This method is used in the money market in some countries of the European Community.

act / act - daily or effective interest method (ICMA method, formerly ISMA method)

  • The interest days are determined exactly to the calendar. The interest year therefore has 365 or 366 days (leap year).
  • Like the interest year, the base year has 365 or 366 days for each calendar year.
  • Interest is not paid on the first day of investment, interest is paid on the last day of investment.

This method is used in the euro area in the capital market and for bonds . A distinction is made between act / act according to the ICMA method and the ISDA method.

30/360 - German (commercial) interest method

unusual sight: February has 30 banking days
  • The interest month is always 30 days, the interest year is always 360 days. In months with 31 days, the 30th and 31st are counted as a total of one day. If the period extends beyond February, it also has 30 days. For transactions that end at the end of February, February is counted with its actual 28 or 29 days. Examples: January 10, 2001 to February 28, 2001 results in 20 + 28 = 48 days, January 10, 2001 to March 10, 2001 results in 20 + 30 + 10 = 60 days, and February 28, 2001 to March 10, 2001 results in 2 + 10 = 12 days.
  • The base year, like the month and year of interest, is set at 360 days regardless of the number of actual days.
  • Depending on the type of investment, either the first day or the last day of investment earns interest and the other day does not. In this sense, contrary to the mathematical approach of the above examples, interest is not paid from, from or to, but with the first day of investment or including the last day of investment.

This method is used, among other things, in the Swiss capital market.

(30 (28-29) / 360) or 30E / 360 - US interest method

  • The method is based on the German commercial interest method, because the interest months are set with 30 days and the interest year with 360 days. The exception is February, which is set to the exact calendar with 28 or 29 days, provided that the beginning or end of the period falls on these days.
  • The base year, like the month and year of interest, is set at 360 days regardless of the number of actual days.
  • Interest is not paid on the first day of investment, interest is paid on the last day of investment.

The 30E / 360 method is used, among other things, in the Swiss capital market.

Working day conventions

In contracts that contain interest calculations, it must also be clarified how to deal with (interest) payments due on weekends and public holidays. With the "following" (following working day), the payday is placed on the next banking day ( TARGET ), with the "modified following" (following working day modified), this principle applies with the exception of the case that the next banking day is in the next month: then the previous banking day is selected. This is to prevent maturities from shifting to the next month - and in December to the next year - by strictly adhering to the following. If the interest periods are contractually stipulated (around 30 days) and the modified following would lead to an effective interest period of only 28 days, a “modified following adjusted” must be agreed.

evaluation

Since the different methods of calculating interest due to the different terms can lead to significant interest differences with the same nominal interest rate, when investing or taking out a loan you should ask which method is used to earn interest.

See also

literature

  • Thorsten Vehslage: Interest calculation methods - correct conversion of annual interest for daily periods , monthly for German law (MDR) 2001, issue 12, p. 673/674.

Web links

Individual evidence

  1. ↑ ISDA Trading Practice Committee ( Memento of the original from October 19, 2017 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. ISDA website. Retrieved January 25, 2012. @1@ 2Template: Webachiv / IABot / www.isda.org