The basic financial statements of NIST provide the following:
The first year’s interest payment is $1000, and it is increased quarterly.
In the second year, the payment continues to be $1000, and it is also increased by 10% (not adjusted for inflation).
After three years, the payment is $2000 and the rate increases $100 every other year until 2023.
The annual growth rate is therefore: 0.3%. Over the life of the loan, a loan made with LIBOR of 8.05% pays a total of $4,600.
Is this an accurate way to compare interest rates?
Not exactly, but it does give a sense of the amount of interest rates paid over the financial year.
You should keep in mind that the term, based on LIBOR and a rate for a given year, could actually be shorter. For example, if a loan was made to a person with two years of repayment, it would have an annual rate of 0.3%, not $4.600 (8.03).
What about if an organization has a loan that is extended over an extended period of time, as in a revolving credit? Is there any difference in interest payment?
Yes. It is very likely that a year-long revolving credit loan used by the company would get a higher annual interest payment than a one-year borrowing for a commercial or residential property. This is because an entire year of borrowing for a commercial property is worth more than one year of borrowing for a residential property.
The annual charge for a year-long revolving credit loan is calculated as follows:
A. Annual percentage rate in effect for the current year;
B. Interest on the outstanding loans which will accrue at the rate in effect for the current year and for the one preceding it; and
C. The accumulated unpaid balance of the existing interest of the revolving loans so not outstanding.
The first year’s interest payment would be $3000, the annual rate of interest would be 8.05%, and $0.30 would be added each year.
If an annual charge for a year-long revolving credit loan was made for an organization with two years of repayment, it would have an annual rate of 8.05% and $0.30 added each year.
What about an annual charge for an organization that has a revolving credit? Does it result in higher interest payments than those made
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