Interest and hidden traps in the interest rate calculation methods

Abstract

Interest rate as a financial institute has been for a very long time a significant element in the standard flow of financial transactions. Nevertheless, no matter how much they have been, in view of their role and importance, normatively regulated and kept under control of the competent institutions, they have always surfaced with new questions and dilemmas. Interests, which are basically representing the money paid or earned for a use of money over the given period of time, in their very nature designate certain mathematical rules for their calculation. The matter of approach to the calculation according to the different methods, from the very start changes calculation relationships and may significantly increase the interest payment liability. In practice, it often occurs that business partners are refusing to recognise our interest rates or under certain pretences are striving to collect more than is seemed appropriate. This paper tends to contribute towards clarification of these sensitive issues that appear in connection with the interest rates, while pointing out at the same time at some of the hidden traps concealed in certain methods of interest rate calculations.

Keywords

• discounted value
• inflation
• internal rate of return
• interest rate
• interest account
• capitalisation
• the time value of money