Currently with the ongoing economic growth, it is common for society to regularly go to financial institutions, for different reasons. A bank or financial entity is not only an institution to store money, in a broader sense banks offer a myriad of services that include the granting of financing at reasonably fair terms.
Financing is one of the businesses with the most economic influx , and it is through it that both parties can benefit, especially banking institutions, it is one of the best forms of investment in the medium and long term. Another fundamental benefit is received by the client, who can obtain financial resources through special financing.
What is the definition and formula for calculating the bank periodic interest rate?
An interest rate corresponds to the price that money has over time, obviously immersed in the financial market, either through credit. There are two types of interest rate, one called passive deposit , and the other called active deposit.
The first is so called because, it is the recognition that a financial institution makes to those who deposit money in it. The second is called active because it is what the institution receives for loans to third parties.
Interest rate periods and modalities
The interest rate is established in periods, conceptualized through the time in which it is settled. In general terms, the most common periods are: annual, semi-annual, quarterly and monthly. The modality of liquids is according to the period, it is done annually, if it is semi-annual it will be settled twice a year and so on.
Likewise, its modality has two aspects; early and expired. This starts from the moment the interest is settled either at the beginning or at the end of the compounding period. Generally the financial market chooses to use the expired modality.
Interest rate types and their formula
There are two types of rates that are constantly used by financial institutions, the nominal and the effective. The nominal rate has an annualized expression and is charged per monthly and quarterly period, it is obtained by multiplying the periodic rate by the number of annual periods. This assumes that the interest generated is not reinvested.
Example: An interest rate of 1% past due is equal to a rate of 12% NAMV, for which the formula is used; nominal periodic = (1- effective) 1 / period – 1.
On the other hand, the effective rate is one that already takes into account the settlement of interest together with its capitalizations. Its most common term is the annual effective, to transform a periodic rate into effective first of all it must be past due, using the formula: effective = (1 – periodic nominal) period – 1.
Equivalence of rates with different modalities and the same periodicity
It is common for rates to be converted, with the goal of buying them either early or past due. It is important to know if they are in different periods or modalities .
The following equations are presented for when it is required to convert an early rate to an overdue rate or a past due rate to early. The formula for the past due rate is “iv = ia / 1 – ia” and the formula for the anticipated rate is “ia = iv / 1 + iv”.
Interest in the capital market is very broad, financing shows commitment to a developed economy, the role of small, medium and large entrepreneurs is essential to generate sources of employment and economic growth.
That is why financing is the key to long-term sustainability and will depend on the formulation and application of the different financing rates, each rate will be adjusted to the client portfolio; depending on the credit history of each.
At this juncture, the financing power consists in the application of terms , hence the importance of interest rates; since through them the modalities and liquidity periods that best suit each financial institution are provided. In this way they can be transformed according to the formula that needs to be applied, to suit the needs of their intermediaries.
