Simple Interest
Use the Simple Interest calculation method to plan balance sheet accounts that are entirely composed of instruments that have uncertain cash flows and uncertain rate changes. Classic examples of these accounts are savings, interest-bearing checking, and credit card GL accounts. The Simple Interest calculation method projects ending balance, average balance, interest income/expense, and FTP (optional). The FTP calculations are enabled by setting the file group variable called FTPCalcFlag to Yes.
The Simple Interest calculation method has three planning methods that the user can use to plan the account balance. Ending balances are calculated and the average is calculated as the average of prior ending balance and projected ending (2 point average). The administrator has the option in the Balance Sheet Projections to allow the user to override the calculated average balance. The administrator can also set the average balance equal to the ending balance, thereby allowing the user to enter the average balance in cases where there are wide daily swings in balances and a 2 point average is not appropriate for projecting average balance. Use this approach if the focus is projecting averages for interest calculations.
| Balance Planning Method | Description |
|---|---|
| Input monthly balance |
This option allows the user to manually input ending balances by month. The calculation method then calculates outstanding new volume balances, based on the difference between the projected ending balance and the current portfolio ending balance. |
| Input year-end balance |
This option allows the user to input the target year-end balance and the calculation method linearly interpolates each month’s end balances. The calculation method then calculates new volume based on the difference between the projected ending balance and the current portfolio ending balance. |
| Apply growth rate |
The budget administrator sets growth rates for all balance sheet ACCTS in the Acct Growth Drivers. The rates, which are applied globally across all plan files, can be adjusted by the user. In the Acct Growth Drivers the administrator also selects, by account, which method to use for calculating balance growth over the remainder of the base year. For more information, see Methods for calculating balance sheet growth. |
IMPORTANT: When you make changes to plan file drivers, you must process the plan file in order to see your changes in the department budget rollup.
User override of the account interest-rate assumptions
The Simple Interest calculation method has a section that allows a user-defined interest spread adjustment and is hidden by default. An Interest Spread Adjustment line is added for users to adjust the global spread over the interest index. User access to this global adjustment line is managed through the Allow users to adjust spread over interest index setting, while the spread percentage is managed through the Spread over interest index setting, both of which are on the Balance Sheet Projections driver.The Interest Spread Adjustment line also has additional controls for individually setting the monthly projected interest spread adjustment.
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User override of the interest spread adjustment
The interest rate on new volumes is equal to the index rate entered in the Interest Rate driver utility by the administrator plus a global spread from the Interest Bearing Map driver. When set by the administrator in the Balance Sheet Projections driver, the budget owner can also add an adjustment to the administered rate to reflect their understanding of their market. 
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Average balance calculation type
An account that is assigned to use the Simple Interest calculation method can be configured to use the average balance calculation type of either Ending Balance or 2 Point Average, which affects the plan file and the cash flow calculation method:
- When the account is configured in the Balance Sheet Projections driver to use the average balance calculation type of Ending Balance, the monthly projected fields display the average balance as equaling the ending balance.
- When the account is configured in the Interest Bearing Map driver to use the average balance calculation type of 2 Point Average, the average balance equaling (prior month ending balance + current balance) ¸ 2.
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Simple interest floor rate
Administrators can set a simple interest floor rate in the Balance Sheet Projections driver.When the average interest rate either matches or goes below the set floor rate, the Average Interest Rate row will display "Floor Rate applied" and indicate the floor rate setting.
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