Variable Interest Rate Instrument- Effective Interest Calculation

[Former Member]

Hi,

We are tracking loans using IRR(Product type 550) in ECC6.0.

Currently the interest calculation is linear/straight line.

We need to calculate interest at the effective rate which is different from the stated rate.

Here is an example:

Market Rate: 10%

Stated Rate : 8%

Loan amount : $1200

Annual Interest @market rate:  $120

Annual Interest @Stated rate: $96

The difference should be amortized.

Could you please help me understand how this can be achieved in money market?

Thanks,

Vamsi

[Former Member · Accepted solution]

HI Vamsi,

In Define Transaction Types., you can check the option Permit Premium/Discount. This will open a new field in transaction structure where you can input the Nominal amount and payment amount. The difference between the 2 will be amortized.

You would also need to assign a Amortization step in your PMP with appropriate amortization method.

For details on the calculation of various available Amortization methods please refer notes - 864857 and 1117778. EIR and IRR will also be determined.

Regards,

Nikhil