VALUE OF MONEY OVER TIME
If we had the alternative of having CU1,000.00 (monetary units) today versus the possibility of having the same amount within 1 year, most of us would definitely, with rare exceptions, choose to have them at the present time. Obviously, this choice is due to the opportunity to obtain liquidity today and that it can be used for various requirements that will provide a present utility for consumption or investment.
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This opportunity to access and satisfy current needs or investments is what differentiates those CU1,000 today and those that we would receive in 1 year. This also suggests to us that there must be some way to balance our decision and to compensate for sacrificing this opportunity in the present for a benefit in the future.
This equilibrium factor that makes money have the same value over time is interest, defined as "the price of present money measured in future monetary units. " This interest is what makes an economic entity waive the immediate availability of its money or any other asset in exchange for receiving future compensation as a price for this waiver.
This interest or compensation will be based on the amount of money received or delivered, at the time during which it is no longer received or returned, the risk we are assuming when delivering this money or to a third party and other factors such as loss of purchasing power of this when it is finally paid to us.
SIMPLE INTEREST
The one that is calculated on a capital that remains unchanged or constant over time and the interest earned accumulates only at the end of this transaction.
COMPOUND INTEREST
So far we have seen how an amount or Final Capital (S) is formed from an interest agreed in the operation and that will be paid on the last day of its maturity, thus ending the transaction. In practice, there are few operations that work with simple interest and the most used is compound interest, especially in the financial system, however later on we will realize that simple interest is part of compound interest.
In the compound, the interest (I) gained in each period (n) is added to the initial capital (P) to constitute a new capital (S) on which it is calculated a new interest to produce what is known as capitalization the which can be annual, quarterly, monthly, daily; and it continues to be applied until the transaction expires as agreed.
INTEREST RATE CLASSES
NOMINAL INTEREST RATE
The interest rate is said to be nominal when:
- It is directly applied to simple interest operations. It can be proportionalized (divided or multiplied) to be expressed in another unit of time less or greater than the calculation period mentioned in the transaction and to be able to apply it to the required interest calculations.
When we talk about simple interest we mention this concept and the important thing is that when we talk about the nominal rate we are talking about a simple interest that we can only divide or multiply to calculate the final amount or principal of an operation. This nominal rate can be used to calculate an effective rate in which case we have to apply the mathematical operation called enhancement or settlement.
Proportional interest rate
It is that which corresponds to different fractions of time, generally periods of less than one year with which it is directly proportional. It is used when we need to calculate the interest (I) in an operation and the mentioned interest rate (nominal) is in different terms to the periods (m), and these calculation periods may be less or greater than the period referred to by the nominal rate.
EFFECTIVE INTEREST RATE (i ef)
The effective rate i ef for n compounding periods can be obtained from an annual nominal rate i n capitalizable m times in the year according to a formula.
This rate reflects the number of capitalizations for passive operations or settlements for active operations. In compound interest we said that capitalized interest returns to earn or accrue interest this is known as Anatocism.
Equivalent Interest Rate (i eq)
Two or more rates are equivalent when capitalizing in different periods, generally less than 1 year, the final amount obtained in the same term is the same.
REAL INTEREST RATE (i r)
It measures the degree to which inflation distorts nominal costs or profitability, decreasing to the value of the effective interest rate. This real rate can be positive or negative depending on the existing inflationary level.
Discounting the inflation rate at the effective interest rate is called deflation.
COMPENSATORY CONVENTIONAL INTEREST RATE
When it constitutes the consideration for the use of money or any other asset. In banking operations, the conventional compensatory interest rate is represented by the active rate for loans and the passive rate for deposits, which are collected or paid by the institutions of the financial system in the process of credit intermediation.
MORATORIUM INTEREST RATE
It constitutes compensation for the debtor's failure to repay the principal and the compensatory interest agreed on its due date. The moratorium interest is charged only when it has been agreed and will be calculated only on the amount of the debt corresponding to the capital, in addition to the compensatory interest rate or the legal interest rate, when it has been agreed.
In the cases in which the loan is repaid in installments, the payment of the moratorium interest proceeds only on the part corresponding to the principal of the unpaid past due installments while this situation continues. (Circular No. 007-99-EF / 90 of March 9, 1999)
LEGAL INTEREST RATE
According to articles 1243 and 1244 of the Civil Code, the legal interest rate in national and foreign currency is set by the BCRP, when interest must be paid without having set the conventional compensatory and / or moratorium rate. The debtor must pay the legal interest that is published daily by the BCRP in effective terms.
INTEREST RATE TO BE REDUCED
It is a simple interest rate that is charged on the unpaid debit balance of a debt.
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