Negative Floating Index Rate
Overview
With the Oxygen release, you can define a negative value for a floating index rate. However, if the effective Interest Rate is not a positive value, the system sets the value of the Interest Rate to the Minimum Interest Rate defined in the lending product.
Create a Loan with a Negative Index Rate
To create a loan with a negative index rate:
Step 1. On a floating rate index, add a negative rate.
For more information on how to add a rate, see Assign Rate to a Floating Rate Index.
Step 2. While creating a lending product, associate the preceding floating rate index with it, and select the Interest Type as Floating.
Step 3. Create a loan contract with the preceding lending product.
Final Interest Rate
The system sets the final Interest Rate as explained in the following table:
| Interest Rate Calculated | Final Interest Rate Set |
|---|---|
| Index Rate + Margin Rate = A negative value | Interest Rate = Minimum Interest Rate |
| Index Rate + Margin Rate = A positive value | Interest Rate = Calculated Interest Rate |
Example
Let us understand how the final interest rate changes with different values of negative index rate.
To understand this example better, it is divided into the following sections:
- Floating Rate Index: This section illustrates the details of the Floating Rate Index created.
- Create a Lending Product: This section illustrates the parameters defined while creating a lending product.
- Scenarios: This section explains the different scenarios where the negative index rate affects the final interest rate.
Floating Rate Index
Let us assume that a Floating Rate Index named FRI Neg is defined with a list of floating rates.
Floating Rate Index
Create a Lending Product
Let us assume that a lending product is created with the following details:
| Field Name | Value | Lending Product Details |
|---|---|---|
| Interest Type | Floating |
|
| Floating Rate Index | FRI Neg | |
| Minimum Interest Rate | 3% | |
| Maximum Interest Rate | 100% | |
| Margin Rate | 0% |
Scenarios
Let us see how a negative floating rate affects the final interest rate with the help of the following different scenarios:
Scenario 1: Floating Rate is negative, and the effective Interest Rate is also negative.
Scenario 2: Floating Rate is negative, and the effective Interest Rate is positive.
Scenario 3: Interest Rate Schedule is created with different Margin Rates.
Scenario 1: When the floating Index Rate is negative, and the effective Interest Rate is also negative, system considers the Minimum Interest Rate.
Create a Contract
Let us assume that a contract is created using the preceding lending product details with the following terms and conditions:
| Field Name | Value | Contract |
|---|---|---|
| Floating Rate Revision Frequency | Daily |
|
| Margin Rate | 0% | |
| Index Rate | Floating Index Rate effective from 5/1/2013 = -12% Note: System computes this value based on the Floating Rates defined earlier. | |
| Interest Rate | Index Rate + Margin Rate = -12% + 0% = -12% Note: System computes this value based on the preceding Index Rate and the Margin Rate defined. | |
| Minimum Interest Rate | 3% |
Save the Contract
On saving the contract, the system automatically sets the value of Interest Rate.
Contract Details with Final Interest Rate
Since the effective Interest Rate is a negative value, that is, -12%, the system sets the value of the final Interest Rate to the Minimum Interest Rate, which is 3%.
Scenario 2: When the floating Index Rate is negative, and the effective Interest Rate is positive, system considers the effective Interest Rate.
Create a Contract
Let us create a contract such that the effective Interest Rate is a positive value as illustrated in the following table:
| Field Name | Value | Contract |
|---|---|---|
| Floating Rate Revision Frequency | Daily. | |
| Index Rate | -12% |
|
| Margin Rate | 20% | |
| Interest Rate | Index Rate + Margin Rate = -12 + 20 = 8%. | |
| Minimum Interest Rate | 3% |
Save the Contract
On saving the contract, the system automatically sets the value of the Interest Rate.
Contract Details with Final Interest Rate
Since the effective Interest Rate is a positive value, that is, 8%, the final Interest Rate remains the same, which is 8%.
Scenario 3: Interest Rate Schedule is created with different Margin Rates.
Add an Interest Rate Schedule to a Contract
Let us say we add an Interest Rate Schedule to a contract, and then save the contract.
Contract with Interest Rate Schedule
Rate Schedule Generated
On saving the contract, the Rate Schedule is generated as follows:
Rate Schedule
The final interest rate in the Interest Rate Schedule is explained in the following table:
| Start Date | Index Rate | Margin Rate | Interest Rate |
|---|---|---|---|
| 5/2/2013 | -12% | 20% | Index Rate + Margin Rate = -12% + 20% = 8%. |
| 5/5/2013 | -12% | 10% | Index Rate + Margin Rate = -12% + 10% = -2% < 0, hence the final Interest Rate = 3%. Note: Since the effective Interest Rate is a negative value, the system sets it to the Minimum Interest Rate of 3%. |