Lesson 8 of 25 · 7 min

What a gap of three months costs

Three silent months freeze a balance that interest has already lifted by thirty-two thousand dollars.

The last confirmed opening in the fixture before March is 1 February at $1,837,260.01. Carry that figure forward as if it were still the balance on 30 April and you are looking at a number the loan left three interest legs ago. February posted $9,959.99, March posted $11,343.47, and the invented April posts $11,182.36. The sum is $32,485.82. The April close is $1,869,745.83. The frozen February opening is $32,485.82 light.

The trigger that belongs to a frozen $1,837,260.01 is $1,837,260.01 ÷ 0.70 = $2,624,657.16. The trigger that belongs to $1,869,745.83 is $2,671,065.47. The gap is $46,408.31, which is also $32,485.82 ÷ 0.70. Three months of capitalised interest, divided by the threshold, is the whole of that movement. No price entered the calculation.

A reconstruction that accrues the three legs itself recovers the $32,485.82, provided the rate path is known. What three missing letters still withhold is the 12 March reset from 6.97 percent to 7.22 percent if you never saw it published, any draw, any unit change, and any haircut revision. The dollar drift is the measurable cost of freezing the old close. The event list is the cost that does not have a dollar until a later letter itemises it.

Three missing statements are three missing openings and three missing event lists. Accrual recovers the first if the rate is known. It does not invent the second.

Key terms

Frozen close: An old confirmed balance treated as if it were still current. Its gap equals every interest leg and principal event since that date.
Rate-path gap: The extra miss that appears when a reset inside the silent interval is never observed, so later days accrue at the wrong rate.

Worked example

1 February held still through 30 April

February opening $1,837,260.01. February interest $9,959.99, March $11,343.47, April $11,182.36. No draws.

Three interest legs: $32,485.82
April close: $1,869,745.83
Trigger on the frozen February opening: $2,624,657.16
Trigger on the April close: $2,671,065.47
Trigger gap: $46,408.31

Three silent months are $32,485.82 of balance and $46,408.31 of trigger if the old opening is frozen, before any price is touched.

Check yourself

The last confirmed balance is $1,837,260.01 on 1 February. Interest of $9,959.99, $11,343.47 and $11,182.36 posts over the next three months. What is the trigger gap if that February figure is still being used as the balance on 30 April?

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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.