Lesson 5 of 25 · 6 min

Reconstructing period 2

The second line is twenty days at a different rate on the same balance, not a new loan.

Period 2 is 12 March through 31 March: twenty days. The index has moved from 5.12 percent to 5.37 percent. The spread is still 1.85 percent. The rate in force is therefore 7.22 percent. The balance is still $1,847,220. No draw and no repayment occurred. The second interest line is a second product on the same principal.

$1,847,220 × 0.0722 × 20 ÷ 360 = $7,409.404666…. The statement prints $7,409.40. Again the match is to the cent. The rate change is 0.25 of a point, which on this balance is $1,847,220 × 0.0025 × 20 ÷ 360 = $256.56 more than twenty days at the old 6.97 percent would have been. That $256.56 is the whole dollar consequence of the reset, isolated from the day-count and from period 1.

Twenty days at 6.97 percent would have been $1,847,220 × 0.0697 × 20 ÷ 360 = $7,152.85. Add the $256.56 and you are back at $7,409.41 before the period-2 rounding settles on $7,409.40. The one-cent difference is the same rounding the next lesson treats as a topic: two rounded legs added together, not one unrounded month.

Nothing about period 2 requires a new facility or a new balance. The header on a statement often shows only 7.22 percent, as if that were the month's rate. It is the rate for these twenty days. The eleven days already charged at 6.97 percent do not get rewritten.

Key terms

Period 2: 12 March to 31 March 2026 on the sample. Twenty days at 7.22 percent on $1,847,220.
Closing rate: Index 5.37 percent plus spread 1.85 percent, which is 7.22 percent. In force from the reset to the month-end.
Isolated reset cost: The extra product from the rate change alone. Here $256.56: twenty days of 0.25 points on $1,847,220, Act/360.

Worked example

Period 2, and the extra 25 basis points

Same opening balance as period 1. Rate now 7.22 percent. Twenty days. Act/360.

Index + spread: 5.37% + 1.85% = 7.22%
Product at 7.22%: $7,409.40
Same twenty days at 6.97%: $7,152.85
Extra from the reset: $256.56
Printed period 2: $7,409.40

The second line is the old balance at a new rate. The $256.56 is the reset in dollars, with the day count held fixed.

Check yourself

Twenty days at 6.97 percent on $1,847,220, Act/360, would print as $7,152.85. The statement prints $7,409.40 for period 2. What is the $256.55-odd gap?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.