How interest is calculated

Interest is worked out one day at a time. Each day the account is open, the system takes a balance, applies the rate in force that day, and divides by a day count. The answer is added to the account’s accrued interest.

When a customer asks why today’s interest is this number, those three inputs are the whole answer.

flowchart LR
    B["Balance the product<br/>measures interest on"] --> A["One day of interest"]
    R["Rate in force<br/>on that day"] --> A
    D["Day count in force<br/>on that day"] --> A
    A --> P["Added to accrued interest<br/>at end of day"]
    style B fill:#059669,color:#ffffff
    style R fill:#059669,color:#ffffff
    style D fill:#059669,color:#ffffff
    style A fill:#1e40af,color:#ffffff
    style P fill:#7c3aed,color:#ffffff

The balance

Which balance a product measures interest on is part of that product’s setup, not a platform rule. On a deposit it is usually the current balance. On a loan it is usually the outstanding balance plus any arrears. On a dealt position it is the principal or the notional amount.

Each day’s interest posts as its own entry, so you can read the figure back day by day. See reading the transaction list.

The rate

The rate is read as of the accrual day, not as of today. Change a rate with a value date of 1 March, and every day from 1 March onward is repriced. See changing a rate and value dating.

The day count

The day count says how much of a year one day is worth. It is the divisor. An account’s day count is its accrual basis, and the conventions we support follow the ISO 20022 InterestComputationMethod external code set.

The conventions, their codes and what each one divides by are in day count conventions.

When the figure lands

Interest accrues at end of day. Your organisation’s product setup decides the timing, and end of day is the norm.

The amount is rounded as it is booked — to four decimal places on products set up for extra precision, and to two otherwise.

Accrued interest sits in its own balance. It does not join the account balance until it is capitalised or paid. See compounding and capitalisation.

Changing the accrual basis

Select Change Accrual Basis to move an account onto a different day count. The operation is available only on account types your organisation has set up with it.

It carries a value date, and that date may be in the past or the future. A backdated change reprices every day from the value date onward, and leaves the days before it alone. See value dating.

Worked example

Alex opens an account at Woodgrove Bank on 1 June with 100,000 at 10%, on Actual / Actual. Five day-ends run, 1 to 5 June. Jordan then moves it to Actual / 360 with a value date of 3 June.

Accrued interest was 136.9865 before the change, five days at 27.3973. It is 138.1280 after it. The two days before the value date keep their original figure; the three from the value date are re-booked.

If the account carries a repayment plan, and your organisation has set the plan to follow this operation, the instalments are re-solved at the same time.

Changing the interest method

The interest method says what happens to interest once it has been earned. There are two answers, and Change Interest Method switches between them.

Choose Pay and you must say where the money goes. The operation asks for the destination and refuses to save without it. Choose Capitalise and it does not ask. See where interest is paid.

Take an account with a balance of 500,000 carrying 10,000 of accrued interest. No day count enters this step — the 10,000 is already measured.

Either way the accrued interest is cleared. The difference is where it goes.

Unlike the accrual basis, the interest method carries no date. It takes effect as soon as it is approved, and the next interest date uses it. The dates themselves are covered in compounding and capitalisation.

Approval

Both changes are usually set to need a second person’s approval before they take effect, and your organisation decides that per operation. See countersign.