Lesson 11 of 25 · 6 min

A draw mid-period: how the legs split further

A mid-month draw adds a third leg; it does not average the balance and apply one rate.

Keep the Halden & Wren March rates and invent a $184,000 draw on 19 March. The reset is still 12 March. The month now contains three stretches on which both balance and rate are constant, not two. Averaging $1,847,220 and $2,031,220 and applying 7.1313 percent to 31 days is a different product, and it is the wrong one.

The three honest legs, 11 + 8 + 12 = 31:

Eleven days on $1,847,220 at 6.97 percent — unchanged period 1, $3,934.07.
Eight days on $1,847,220 at 7.22 percent, from the reset to the morning of the draw, $2,963.76.
Twelve days on $2,031,220 at 7.22 percent, from 19 March through 31 March, $4,888.47.

The products: $1,847,220 × 0.0697 × 11 ÷ 360 = $3,934.07. $1,847,220 × 0.0722 × 8 ÷ 360 = $2,963.761866…, which prints as $2,963.76. $2,031,220 × 0.0722 × 12 ÷ 360 = $4,888.469466…, which prints as $4,888.47. The month totals $11,786.30. Without the draw the month was $11,343.47. The difference is $442.83, and $184,000 × 0.0722 × 12 ÷ 360 = $442.8266…, which prints as $442.83. The extra charge is twelve days of the drawn $184,000 at 7.22 percent, nothing else.

The close becomes $2,031,220 + $11,786.30 = $2,043,006.30. A blended-balance shortcut — 19 days at $1,847,220 and 12 at $2,031,220, times some single rate — has to smuggle the reset and the draw into one number, and it will not recover $11,786.30 unless that number is reverse-engineered from $11,786.30. Three products will.

Key terms

Draw: An advance that raises the outstanding balance on a stated date. It begins a new leg; it does not rewrite the old ones.
Three-leg month: A period that contains both a reset and a balance change. Each constant stretch is its own product.

Worked example

Nineteen March, $184,000 drawn

Same March rates as the sample. Draw $184,000 on 19 March, so the later balance is $2,031,220.

11 days × $1,847,220 × 6.97%: $3,934.07
8 days × $1,847,220 × 7.22%: $2,963.76
12 days × $2,031,220 × 7.22%: $4,888.47
Month with the draw: $11,786.30
Month without the draw: $11,343.47
Extra, isolated: $442.83

The draw costs twelve days of 7.22 percent on $184,000. The first two legs are the sample month cut at the 19th.

Check yourself

A $184,000 draw on 19 March splits March into 11, 8 and 12 days. What is the interest on the third leg, and what is the extra cost against the sample month?

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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.