Overview

In most countries legal interest needs to be calculated. How this needs to be calculated varies widely. It is usually calculated as simple interest based on a daily rate.

Usually interest includes the start date (dies a quo) but not the end date (dies ad quem). If interest for the end date needs to be included, adjust the end date to the next day.

Depending on the context, interest is calculated with a fixed rate or with rates that vary depending on published rates. Rate changes can occur once a year, every month or on specific dates.

InterestThing can be set up to calculate legal interest correctly. Interest is usually calculated based on the number of days in the period and the number of days in a year. The resulting year fraction depends on how leap days and leap years are treated.

Below are some day count conventions that may apply:

Day count convention	Details
Act/Act ISDA	The actual number of days that fall in a normal year divided by 365 is added to the actual number of days that fall in a leap year divided by 366. If the date interval includes leap days, for instance from October 1st, 2023 to October 1st, 2024 the year fraction for a one year is 92/365 + 274/366 or 1.000689.
Act/365 Fixed	The actual number of days is always divided by 365. Note: leap days are added as 1/365, for instance from October 1st, 2023 to October 1st, 2024 the year fraction is 366/365 or 1.002740.
Act/365 Leap	The actual number of days is divided by 365 if the end date does not fall in a leap year. If the end date does falls in a leap year, the actual number of days is divided by 366. This way, one year periods return a fraction of 1.00 (365/365 or 366/366). Note: for date intervals that are longer than one year, the actual days are divided by 365 or depending on whether the end date falls in a leap year.
Act/365 No Leap	If the date interval does not contain any leap days, the actual number of days is divided by 365. If there are leap days in the date interval, they are subtracted form the number of actual days which is then divided by 365. Note: if the date interval ends on a leap day, it is not subtracted as the last day in a date interval is never counted. For instance, the interval from February 28th, 2023 to February 29th, 2024 is counted as 366/365.

For more examples on how these day count conventions calculate, open a new Day Count Conventions window and select the ISMA Rule 251 sample data.

Single rate calculations

Interest on a sum of $10,000 is due starting on October 1st, 2023, the end date is April 28, 2025.

Set up the following cash flow or open the Single rate legal interest example in the Help > Examples menu.

Date	Type	Value	Occurs	Comment
10-01-2023	inflow	10,000	once	Principal
04-28-2025	balance date		once	End balance

When there is just one fixed rate to take into account, all you need to do is to enter the rate in the Rate field, add an Inflow event with the sum you want to calculate inerest for and a Balance date event with the amount on which interest needs to be calculated.

Example 1

If daily interest is defined as 1/365 of the rate for a 365 day year, change the compute options to calculate simple non capitaized interest based on a year fraction as calculated by the Act/365 Fixed day count convention.

Switch to the Schedule tab to see that for an annual rate of 4 % interest due on April 28, 2025 is $630.14 and the total due is $10,630.14. The details tab shows 575 days and the denominator is 365.

Example 2

If daily interest is defined as 1/365 for days in normal years and 1/366 for days in leap years, change the compute options to calculate simple interest based on a year fraction as calculated by the Act/Act ISDA day count convention.

Switch to the Schedule tab to see that interest due on April 28, 2025 is $629.04. The details tab shows a 92/365 fraction for 2023, one full year for 2024 and a 117/365 fraction for 2025.

Multiple rates calculations

When multiple rate changes occur in the interest period, you need to add Rate change events that cover the whole period.

Suppose annual interest is 5.25 % for 2023, 5.25 % for 2024 and 4.50 % for 2025, you would enter these as Rate change events on January 1st, for each rate. In this case the rate in the Rate field is ignored as the rate is set by the first Rate change event.

Set up the following cashflow or select the Legal interest multiple rates example in the Help > Examples menu.

Date	Type	Value	Occurs	Comment
01-01-2023	rate change	5.25	once	Rate for 2023
10-01-2023	inflow	10,000	once	Principal
01-01-2024	rate change	5.75	once	Rate for 2024
01-01-2025	rate change	4.50	once	Rate for 2025
04-28-2025	balance date		once	End balance

Example 3

In this example the Act/Act ISDA day count convention is used.

Switch to the Schedule tab to see that for the given annual rates interest due on April 28, 2025 is $851.58. On the rate change dates, you can see the accrued interest for 2023 and 2024.

For the events from October 1st, 2023 to April 1st, 2025, the Details tab shows a 92/365 fraction calculated at 5.25 % a fraction of 366/366 or one full year at 5.75 %, and a 117/365 fraction calculated at 4.50 %.

TIP

If you need to perform this kind of calculaton regularly, it is best to set up a template document that includes all Rate change events, either by entering them manually or by importing them from a tab separated text file.

Once saved, you can check Stationary Pad in The Finder's Info window so that when opened it will create a copy in which you just need to add the Principal event and delete the Rate change events that you don't need.

Intermediate capitalization

In some cases, interest is capitalized on the anniversary date of a judgment.

If interest needs to be capitalized on the anniversary date, change compute options to calculate using capitalized simple interest using year fraction as the date interval setting.

To avoid implicit capitalization, you would normally not use capitalized simple interest in combination with year fractions. In this context this is exactly what is needed.

Example 4

To capitalize on the anniversary date in the previous example, add an Infow event for October 1st, 2024 with a zero amount. Note: is the date interval includes multiple anniversary dates, change the Inflow event to occur annually for the required number of years.

Switch to the Schedule tab to see that for the given annual rates interest due on April 28, 2025 is $867.82. On the rate change dates, you can see the accrued interest for 2023 and 2024.

While the Details tab shows the same fractions, the difference with the previous non capitalized example is visible in the Schedule tab: on October 1st, 2024 the accrued interest up to that date i.e. $562.79 is added to the balance due, hence the higher accrued interest on January 1st, 2025 and April 28th, 2025.

To see the (internal) balance due being adjusted on the anniversary, add a Balance date event on October 1st, 2024.

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