Interest Short-term Deposits Item General introduc tion / Role in Simfi
Description This formula is used to calculate the interest charges on three-month short term deposits entrusted to the MFI. The three-month deposits serve as an example for all short term and long term borrowed funds, which behave in a similar way.
Where?
Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses > For client deposits Deposits: money entrusted by the MFI’s clients to the bank, at a fixed interest rate and for a fixed period. Usually, deposits denote larger amounts.
Definitions
Borrowed funds: financing obtained from other banks and financial institutions at a fixed interest rate and for a fixed period. Typically, these are larger amounts. Formula
The formula is:
Input data
ℎ
ℎ
ℎ ×
ℎ
Monthly Interest Rate Deposits: this percentage is given on a monthly basis to make the calculations simpler. Monthly interest rates can be converted to annual interest rates using the following formula:
= (1 +
ℎ
)
−1
The interest is calculated on a monthly basis. So, within a three month reporting period of the simulation, three interest calculations are carried out. However, the interest does not accrue. The interest amount does not vary and stays with the deposit cohort until redemption. The interest is due at the end of the month and is calculated before the deposit pay-back takes place. Pay back rate: this pay-back rate is determined by the duration of the deposit. On three-month deposits, 1/3 of the principal is paid back at the end of the month. Calculations
At the end of the month, the amount subject to interest charges is calculated after deduction of redemptions.
Example Deposits Started Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1 Total New Contracts
1JanQ1
31JanQ1
1FebQ1
28FebQ1
1MarQ1
Totals 1,000.00
1,000.00 500.00
1,000.00
31MarQ1
500.00
500.00 1,500.00
1,500.00
1,500.00
3,000.00
Table 1: Three deposit cohorts starting at the first of each month
We consider one decision period of a quarter, or three months. Every month, a new Deposit cohort is initiated. In order to show the transgression from one month to the next, the first and last dates
of the months are listed separately. Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1
Monthly Interest 2.00% 3.00% 1.00%
Monthly Redemption 33.33% 33.33% 33.33%
Table 2: Monthly interest and redemptions
At the end of every month, the pay-back amount or redemption is calculated. Redemption Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1 Totals
1JanQ1
31JanQ1 333.33
1FebQ1
28FebQ1 333.33
333.33
1MarQ1
31MarQ1 333.33
Totals 1,000.00
166.67
166.67
333.33
500.00
500.00 1,000.00
500.00 1,833.33
Table 3: Three Deposit cohorts starting at the first of each month
For instance, the amount in table 3 under Deposits1JanQ1, at the end of January, equals 333.33. This pay-back amount is calculated by taking the initial Deposit amount of 1,000.00 and dividing this number by three. 31!
"1 =
1,000 = 333.33 3 ℎ
Since the interest amount is calculated before pay-back, we arrive at the following overview of the amounts, subjected to interest charges at the end of the month. Subject to Interest charge Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1
1JanQ1
31JanQ1 1,000.00
1FebQ1
28FebQ1 666.67 500.00
1MarQ1
31MarQ1 333.33 333.33 1,500.00
Table 4: Amounts subject to interest charges at the end of the month
For the cohort Deposits1JanQ1 the amount for 31JanQ1 is just the 1,000.00 For the cohort Deposits1JanQ1, the amount for 28FebQ1 can be calculated by subtracting the redemption for January. The redemption for February is not taken into account yet, since the interest is calculated before pay-back. & '( )
-ℎ
. 28, '"1 = 1,000 − 333.33 = 666.67
The same goes for the amount on 31MarQ1, with two redemptions to account for: & '( )
28, '"1 = 1,000 − 333.33 − 333.33 = 333.33
Finally, we can calculate the actual interest by multiplying the amount subject to interest charge by the interest rate. Just a reminder: the interest rate is fixed and stays with the Deposit cohort. Interest charged Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1 Totals
1JanQ1
31JanQ1 20.00
20.00
Table 5: Interest charged at the end of the month
1FebQ1
28FebQ1 13.33
1MarQ1
31MarQ1 6.67
Totals 40.00
15.00
10.00
25.00
28.33
15.00 31.67
15.00 80.00