7.8.13 Interest in Advance Calculations

The following steps apply to an interest in advance records only. Interest in advance instruments makes their first payment on the origination date. The last payment, on the maturity date, is a principal only payment.

Determine new current payment on schedules and patterns. The current payment is calculated as described in Steps, earlier.

1. Calculate Principal Runoff.
2. For interest in advance records, the principal runoff occurs before the interest cash flow is calculated. Because conventionally amortizing instruments cannot have interest in advance characteristics, amortizing interest in advance instruments are always level principal. Therefore, the principal runoff equals the current payment amount.

   For the payment on the maturity date, all remaining principal is also paid off.

3. Update the current balance. Before calculating the interest cash flow, the current balance must be updated for the amount of principal runoff. If the payment date is the maturity date, the balance is set to zero, and no further calculations are necessary.
4. Calculate interest cash flow. If the payment date is not the maturity date, an interest in Cash Flow is made. The Interest Cash Flow calculation for interest in advance instruments is similar to the interest in arrears calculation. The calculation differs in the count for the number of days. Rather than counting from the last payment date to the current payment date, the number of days is counted from the current payment date to the next payment date.
5. Update remaining number of payments. After a payment has been made, the underlying data must be updated in predation for the next event. The remaining number of payments is reduced by 1.
6. Update the next payment date. For standard amortization instruments, the next payment date is set equal to the current payment date plus the payment frequency.

   Next payment datem = Current payment date + payment frequency

   If the instrument is an Amortization Schedule, the next payment date is determined from the dates in the schedule table.

   If the instrument is an Amortization Pattern, the next payment date is determined by incrementing the current payment date by the current payment frequency for relative patterns. For absolute patterns, the next payment date is determined by the next consecutive date in the pattern.

   If the remaining number of payments is equal to 1, or the next payment date is greater than the maturity date, the next payment date is set equal to the maturity date.