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How one adjusts the [[calculation period]] for a given [[interest period]] to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. There are two things you might wish to adjust here: one is settlement of the interest payment — that is, ''the day on which the interest payment is actually made'', the other is the duration of the interest period — that is ''the day on which the [[interest period]] in question is [[deemed]] to end<ref>Which, to state the bleeding obvious, is also the date by reference to which the next period starts.</ref>''. [[Fixed rate]] products are a lot less bother than [[floating rate]] products. | How one adjusts the [[calculation period]] for a given [[interest period]] to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. There are two things you might wish to adjust here: one is settlement of the interest payment — that is, ''the day on which the interest payment is actually made'', the other is the duration of the interest period — that is ''the day on which the [[interest period]] in question is [[deemed]] to end<ref>Which, to state the bleeding obvious, is also the date by reference to which the next period starts.</ref>''. [[Fixed rate]] products are a lot less bother than [[floating rate]] products. | ||
*'''[[Fixed rate]] products - yeah whatever''': Folks tend to be fairly sanguine about interest payments for [[fixed rate]] interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the [[present value]] of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can't pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two's interest on the interest, but you’ll make that up next time. | *'''[[Fixed rate]] products - yeah whatever''': Folks tend to be fairly sanguine about interest payments for [[fixed rate]] interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the [[present value]] of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can't pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two's interest on the interest, but you’ll make that up next time. | ||
*'''[[Floating rate]] products - hold on tiger''': [[Floating rate]] products are a bit more nuanced because there is some [[path dependent|path dependency]] here. The end of an interest [[calculation period]] determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates — at least in the good old days — | *'''[[Floating rate]] products - hold on tiger''': [[Floating rate]] products are a bit more nuanced because there is some [[path dependent|path dependency]] here. The end of an interest [[calculation period]] determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates are — or, at least, in the good old days ''were'' — volatile, the product is [[path dependent]] and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping in Amazon rainforests and all that. | ||
===[[Business day convention]]s for your reading pleasure=== | ===[[Business day convention]]s for your reading pleasure=== | ||