Effective Interest Model

Our Effective Interest Model is an easy to use Excel-based Model to determine the effective interest rate in accordance with ASC 310-20 (formerly FAS91). The Model computes an effective interest rate and then determines current period and cumulative amortization over the term of the instrument. Unlike the straight-line method which results in a fixed amount of amortization per month, the effective interest method adjusts the amortization each month to result in a level or constant yield.

The Model also provides a convenient comparison to the straightline method, so that a company can determine if the two methods will produce a result that is materially different. This is a very handy feature to compare currently booked amortization against the level-yield computed value.

Model Application

The Model can be used to compute effective yield and amortize the following types of transactions

1. By companies who are borrowers
   • Fees paid to originate a lending transaction
   • Discount or premium to originate a lending transaction
   • Debt issuance costs for bonds payable, convertible notes and other similar instruments
2. By companies who are lenders
   • Fees received to originate a lending transaction
   • Costs incurred to originate a lending transaction
   • Discount or premium on a lending transaction
3. By entities that buy or repurchase loans or pools of loans
• Purchase premium or discount, by loan or on a pool basis
4. By bond holders or purchasers
   • Premium or discount on bonds
5. By auditors
   • To audit the amortization and remaining unamortized balances for any of the transactions listed above

Model Versions

We offer two version of this product. Both are sold on a download basis for immediate use and do not require any ongoing support contract. Select the Fixed Rate model if you have only fixed interest rate instruments. The Fixed Rate model sells for $499 (see below).

Select the Variable Rate model for fixed or variable rate instruments (the model defaults to using the provided interest rate for all months while allowing individual month inputs). The Variable rate model also allows cash-out from the loan (such as a line of credit). The Variable Rate model sells for $599 (see below).

Under current accounting rules, most fees, costs, discounts and premium amounts paid or received should be deferred and recognized over the term of the underlying instrument. Our Models allow you to determine the amount of amortization and the remaining unamortized balance for each month until the instrument reaches maturity.

Both models provide three interest computation models: a 360/30 Interest model (approximation using 360 days per year with 30 days per month), Actual Days using the calendar days for each month and year (considering leap years and the actual number days in each month), and 360/Actual Days Interest model that considers the days in the month (including leap years) but sets the days in the year to 360 (an interest model used by some finance companies). Either interest model can be used to compute the effective yields. The 360/30 model is commonly used to simplify straightline interest computations where the actual days model is more precise.

Both models can support maturities up to 480 months and provides inputs for Fees, Costs (for lenders), Discount or Premium to compute the level yields for each input. Any number of months (2 at a minimum) can be entered for the term of the instrument providing maximum flexibility.

As an added feature the Models also allow for payment adjustments which can be used to assume a certain constant level of prepayment, to capture a one time prepayment, or to true up the principal of a loan or pool of loans for actual prepayments. The Variable Rate model uses an input for the monthly payment simplifying the record keeping for loan transactions. The Fixed Rate model simply allows you to adjust the scheduled payment to correct for loan transactions.

The Model is an Excel Workbook with detailed computation and information display that can be provided to your auditors or client (if you are the auditor) to support your position.

The Effective Interest Rate Model for Fixed Interest Rate Analysis is available for $499 (US Dollars) for download.

Product Details
This product can be purchased online and downloaded for immediate use. Once purchased, there are no ongoing costs, and it can be used by unlimited users within the same Company or entity. In order to use our Tools, you must have a current version of Excel (Office XP or greater).

We offer a variety of Excel-based tools to assist companies in complying with accounting requirements. This Tool take assumptions as inputs and with the push of a button, produces amortization based on those assumptions using industry-standard methods. The formulas are protected from tampering to prevent accidental deletion or modification.

We also provide consulting services to assist with FAS91 evaluations. Please contact us at consulting@procognis.com for more details.

Feel free to contact us at sales@procognis.com if you have any questions about this Tool.

Example Screenshots from our Effective Interest Rate Model (Variable Rate Version):