(1)Analyze the Article I Attached and Discuss the Author's Perspective of Calculating Interest

(1)Analyze the article I attached and discuss the author's perspective of calculating interest.

DESCRIPTION OF INTEREST

RATE VERSUS METHOD OF

CALCULATING INTEREST

Many bankers remember learning for the first time that

an interest rate can be greater than 100 percent of the rate

stated in a promissory note. For example, one could assume,

when calculating interest, that each day is 1/360th of a year

instead of 1/365th or 1/366th. Simple arithmetic indicates

that 365 times 1/360th is greater than one. A banking lawyer

might protest until referred to the underlying note.

The drafter of a note for Keybank slipped up in JNT

Properties, LLC v. Keybank, 2012 Ohio 5369 (2012). The

misstep probably cost the bank more in litigation fees than

the extra annual 5/360ths were worth.

Keybank loaned money to the plaintiff. The promissory

note provided for a variable rate tied to the Federal

Home Loan Bank of Seattle 5-Year Intermediate/Long Term

Advances Fixed Rate published daily, to be adjusted every five

years. According to the note, the index currently was 5.68%

per annum and that the “initial interest rate applied to the

unpaid principal balance of this Note will be at a rate of 325

basis points (3.25%) over the index, resulting in an initial

rate of 8.93% per annum.” Under the heading “Payment,”

the note stated: “The annual interest rate for this Note is

computed on a 360/365 basis; that is, by applying the ratio

of the annual interest rate over a year of 360 days, multiplied

by the outstanding principal balance, multiplied by the

actual number of days the principal balance is outstanding.”

The plaintiff filed a putative class action, alleging that

Keybank had breached its contract by charging interest in

excess of the rate stated in the note, by calculating the rate

using a 365/360 method rather than an annual rate. Keybank

responded by arguing that the note fixed the interest rate

according to the 365/360 method, which by definition

resulted in a borrower paying more interest than when the

interest is calculated by the 365/365 method.

The trial court granted summary judgment to the bank,

but the court of appeals reversed and concluded that a

genuine issue of material fact remained as to which interest

rate the note imposed. The Supreme Court of Ohio, which

reversed the court of appeals and reinstated the trial court’s

summary judgment, emphasized that the real issue was

not whether the 365/360 method of determining interest

resulted in a higher effective interest rate. It undeniably did.

The issue was whether the clause that defined the method by

which interest was calculated was ambiguous.

The Supreme Court of Ohio began by pointing out that

interest can be calculated in several ways. The simplest is

annually, but most loans don’t last exactly one year or two

years or three years, etc. Instead, banks charge interest on a

daily basis. Because of the difficulties of our calendar, banks

have developed three approaches. These are the 365/365

method (or perhaps 366/366 in a leap year, “exact day

interest”), the 360/360 method (“ordinary interest”), and

the 365/360 method (“bank interest”). The most common

method in commercial loans is to use the actual number of

days the loan is outstanding in a year and a 360-day year.

Because the numerator and denominator do not match as

they do in the other methods, the 365/360 method increases

the effective interest rate by .01389 in a non leap year. The

plaintiff ’s contention that over the course of a year it was

paying more interest than it would if it paid annually was

unassailable, but not dispositive.

In the court’s view, read in context, the clause was not

ambiguous. Rather, the clause “[t]he annual interest rate for

this Note is computed on a 365/360 basis,” followed immediately

by a detailed description of the 365/360 method, was

imprecise but not so confusing that any reasonable person

would think that the rate set by the note would be calculated

using something other than the 365/360 method. The term

being defined clearly was the method of computing regular

interest payments, not the annual interest rate.

The court concluded: “There is no doubt that the clause

at issue was not written as well as it could have been. There

is equally no doubt about what the clause was meant to do:

define the method used to calculate interest payments.”

Observations

The drafter might have avoided litigation by deleting one

word, “rate,” from the problematic sentence: “The annual

interest rate for this Note is computed on a 360/365 basis;

that is, by applying the ratio of the annual interest rate over a

year of 360 days, multiplied by the outstanding principal balance,

multiplied by the actual number of days the principal

balance is outstanding.” Fortunately, he or she used the word

“is” instead of “was” near the beginning of the sentence, and

included “the actual number of days the principal balance

is outstanding,” both of which made clear that time had to

pass to apply the formula – so that the formula must refer to

the method of calculating interest rather than the method of

determining the interest rate.

Unfortunately, the bank had to travel all the way to the

Supreme Court of Ohio to earn the drafter a “D” instead of

an “F.”

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(2)The effective interest rate on any form of debt is that discount rate at which the present value of the payments made by the borrower equals the amount actually borrowed. To determine this rate present value table can be utilized, or the rate is estimated when present value tables are unavailable. There are two methods used in estimating the effective interest rate, which are the linear and the nonlinear method. Analyze and compare the linear and nonlinear method of estimating the effective interest rate.

(3) The tangible and intangible assets are material and value investments with the period of usage exceeding the length of a financial year. The depreciation process is used to consign that part of the value which is transmitted on, to the goods, workings and services. There are three depreciation concepts which are the economic concept, the financial concept, and the accounting concept. For everyone, expand this discussion by analyzing the thee depreciation concepts.