1.1.2 Methods of Interest Application

Interest can be applied in different ways, as follows:

Fixed

An interest rate is fixed at the time of initiating the contract. The repayment amount is computed based on this rate of interest and the repayment schedule.

However, the interest rate applicable on a contract can be changed after the contract has been initiated. You should indicate that this change should come into effect as of a date called the Value Date. The interest amount is computed based on the new rate effective from the value date.

Floating

The market rates (with a spread or without it) are applied on the contract. This application can be done in two ways.

• every time the market rate changes
• only at periodic intervals

The market rates are stored in the floating rates table. The rates are defined for a combination of rate codes and currency. If the rates have to be applied periodically, the frequency of application should be defined for each contract.