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In Customizing, you define interest rate conditions for reference interest rates. Interest rate conditions describe when and how much money is paid for the interest rate instrument underlying the reference interest rate. This enables you to influence the calculations that are made when yield curves are created. The interest rate conditions that can be set for the reference interest rate are:

  • Currency: Currency in which the underlying interest rate instrument is managed.

  • Interest calculation method: Specification of the daily payment method and the method in line with which the number of days per year are calculated.

  • Term/time unit: Specification of the term of the underlying interest rate instrument in the specified time unit.

  • Payment frequency: Specification of the intervals in which interest payments are made. A distinction can also be made between par and zero interest rates by means of the payment frequency.

  • Compounding frequency: Specification of the duration of the period in which interest is calculated. Interest is calculated on capital that is paid in within a year using the equation shown in the figure below:



    where m indicates the compounding frequency; for example, m=4 quarterly compounding.

    Example

    For mortgage loans, the nominal interest rate is usually specified with monthly compounding (m=12) when payments are made monthly. The effective interest rate for the mortgage loan is, however, specified with yearly compounding (m=1).

  • Calendar: The calendar selected here forms the basis for the settings made in the Number of Working Days for Interest Fixing and Shift Value Date to Working Day fields. If you have selected the interest calculation method actW/252, the system uses this calendar to determine the public holidays.

  • Number of working days for interest fixing: Specification in working days of the duration between the interest fixing date and the start of the first interest period.

  • Shift value date to working day: Specification of the direction in which the payment date is shifted if it falls on a public holiday. The shifted payment date can be either before or after the original date that falls on the public holiday.

  • Maturity dates at month-end: Governs whether maturity dates are to be set to month-end if the start of the term of the interest is at month-end.

  • Forward yield curve type: Yield curve type used to calculate the forward interest rates for the reference interest rate selected.