Correct way to calculating interest accrued with leap year

Question

Principal is $119,654.7 compounding semi annually Disbursal Date is 11/25/2015 Initial Payment is 3/15/2016 Interest Rate 9.1%

In this case - there is 36 days in 365 - there is 75 days in 366 - Total of 111 days

How should interest Accrued be calculated?

Example 1.

 InterestAccrued = (((1 + 0.091/2)^2 )^ (36/365 + 75/366)  - 1 ) * 119654.7
                 = 3276.27

Or should the interest accrued be split and added together like below

Example 2.

 InterestAccrued = (((1 + 0.091/2)^2 )^ (36/365)  - 1 ) * 119654.7
                 = 1054.84895
 InterestAccrued += (((1 + 0.091/2)^2 )^ (75/366)  - 1 ) * 119654.7
                 = 3256.86

Or should the interest balance be added on to the balance before calculating interest accrued

Example 3

 InterestAccrued = (((1 + 0.091/2)^2 )^ (36/365)  - 1 ) * 119654.7
                 = 1054.84895
 InterestAccrued = (((1 + 0.091/2)^2 )^ (75/366)  - 1 ) * (119654.7 + InterestAccrued )
                 = 3276.27

The finance companies with which I have experience have used either a fixed 360 or 365 day year, so they ignore leap years. — Bishop, Nov 30 '15 at 16:01

score 1 · Answer 1 · answered Dec 01 '15 at 16:44

1

In an actual/actual loan, your example number 2 is correct. The interest is accrued at a daily rate in 2015 that is different than 2016, so it needs to be calculated separately and added together.

answered Dec 01 '15 at 16:44

Bishop

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Correct way to calculating interest accrued with leap year

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