10 errors in interest charge calculations

Interest calculations are often wrong.

Interest charge calculations should be quite simple but their calculation seems to be a common source of error. I thought I would share with you a few of the interest related errors that I would look for if I wanted to quickly find a mistake in your financial model. This list is a subset of the list which constitutes the “Check Interest Calculations” consideration which is 1 of Navigator’s 100 point check list applied before a model is released to a client.

Hopefully this list will be useful for you in checking your interest calculations.

Interest rate being incorrectly reduced from annual to quarterly equivalents
Closing balance of an account used as the basis for the interest charge
The number of days in a period calculated incorrectly
Not all senior facilities included in the cost of debt driver for the LLCR
The margin is tied to calendar of financial periods rather project periods
Interest rate hedging % applied to the floating rather than fixed rate
Base rate (for US LIBOR facilities) not using the correct number of days - 360 is typical.
Interest being deducted from outstanding balance as well as the principal - a common mistake for users of PMT function
Only the last of a 3 month interest period used for quarterly interest modelling in a monthly calculation framework
PRI margin not included in the all-in (total rate)

So take care when calculating your interest payments, it often helps to know roughly what the amounts should be before calculating them in the model. Good luck and make sure those interest calculations are not ‘interesting’ !