Saturday, October 22, 2016

Interest, Repayment,Collateral and Recourse Of Debt

Interest

For some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid. This may be because upfront fees or points are charged, or because the loan has been structured to be sharia-compliant. The additional principal due at the end of the term has the same economic effect as a higher interest rate. This is sometimes referred to as a banker's dozen, a play on "baker's dozen" – owe twelve (a dozen), receive a loan of eleven (a banker's dozen). Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($11–$10)/$10 = 10 percent interest; however, if one borrows $9 and must repay $10, then this is ($10–$9)/$9 = 11-1/9 percent interest.Interest is the fee charged by the creditor to the debtor.
Many conventions on how interest is calculated exist – see day count convention for some – while a standard convention is the annual percentage rate (APR), widely used and required by regulation in the United States and United Kingdom, though there are different forms of APR.
Interest rates may be fixed or floating. In floating-rate structures, the rate of interest that the borrower pays during each time period is tied to a benchmark such as LIBOR or, in the case of inflation-indexed bonds, inflation.
 Interest is generally calculated as a percentage of the principal sum per year, which percentage is known as an interest rate, and is generally paid periodically at intervals, such as monthly or semi-annually.


Repayment

Amortization structures are common in mortgages and credit cards. There are three main ways repayment may be structured: the entire principal balance may be due at the maturity of the loan; the entire principal balance may be amortized over the term of the loan; or the loan may partially amortize during its term, with the remaining principal due as a "balloon payment" at maturity.



Collateral and recourse

Unsecured debt comprises financial obligations for which creditors do not have recourse to the assets of the borrower to satisfy their claims. A debt obligation is considered secured if creditors have recourse to specific collateral. Collateral may include claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case of a consumer).