# Interest Cost

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## Interest Cost (IC)

A comprehensive and time-adjusted measure of loan cost to the borrower.

IC on a Mortgage: IC is what economists call an “internal rate or return.” It takes account of all payments made by the borrower over the life of the loan relative to the cash received up front. On a mortgage, the cash received up front is the loan amount less all upfront fees paid by the borrower. On an ARM, IC captures the effect of interest rate changes on the monthly payment and the balance, but future rate changes must be assumed.

Formula: IC is (i) in the formula below:

L - F = P1 + P2/(1 + i)2 +… (Pn + Bn)/(1 + i)n
Where:

L = Loan amount

F = Points and all other upfront fees paid by the borrower P = Monthly payment

n = Month when the balance is prepaid in full

Bn = Balance in month n

IC Versus APR: IC differs from APR in the following ways: IC is measured over any time horizon, whereas APR assumes that all loans run to term. IC may be measured after taxes whereas APR is always measured before taxes. On an ARM, IC can be calculated on any interest rate scenario whereas APR always uses a no-change scenario.

References in periodicals archive ?
Historically, the most common interest cost calculation used by issuers for awarding bids is the net interest cost, or NIC.
Therefore, the ROE would be 3.33 times as large as the ROA after adjusting for interest costs. In the example from Part I, the ROA was 7.62 percent, less an interest cost adjustment of 1.28 per cent, giving an adjusted ROA of 6.34 percent.
The press routinely reports extraordinarily large government deficits, mainly consisting of interest costs, for countries experiencing high rates of inflation.(1) For example, the New York Times reported that in 1993 Brazil's government deficit was 30 percent of the country's gross domestic product (GDP).(2) Most of this deficit was accounted for by interest costs.
However, the money in your life insurance policy is continually accruing a market interest rate of 4%, so your net interest cost would be 2%.
When the bids are opened, the group representing the lowest interest cost to the issuer wins the bidding.
34, Capitalization of Interest Cost, provides guidelines for the calculation of the amount of interest to be capitalized and for the disclosures required in the financial statements.
This third-party credit enhancement improves the quality of a debt issue and increases its marketability, thereby reducing the borrower's interest cost. However, outside credit assistance is not free.
"Due to the capital deficiencies on SPTT's balance sheet, banks increase the interest cost or cause the temporary unavailability of the credit facility to SPTT," Phoenix Petroleum explained.
This was attributed by Reyes to 'margin compression due to significantly higher deposit interest cost, lower fixed income trading profits, and almost half year suspension of its rural bank subsidiary's lending program to teachers.'
During the quarter, interest costs increased by two per cent to KWD 6.2 million compared to Q1 2011 interest cost of KWD 6.1 million primarily due to increase in the margin of the restructured facility by one per cent.
The fresh funding has reduced the total interest cost for the project from ` 16,175 crore in the initial financing arrangement, to ` 9,666 crore after the closure of the offshore loans at low interest rates, the sources said.
The ratings are constrained by working capital intensive industry leading to high level of fund-based bank facilities, high overall gearing, significant interest cost hikes, exposure to group companies, occasional state intervention affecting the industry performance, volatile prices and industry's dependence on weather conditions.

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