Interest, in banking terminology, we treat as a cost that is charged for the use and use of borrowed financial capital to a given recipient. A standardized measure of such a cost, converting it into a unit of capital and 365 days of use, is the interest rate. Banks treat interest as the cost of obtaining funds financing their current operations (usually in the form of deposits or issued debt securities) or as a multi-period income which is derived from the capital obtained by the bank, usually due to loans and credits granted. The difference resulting from interest income earned by the bank and the interest costs paid by them is the net interest income, which is referred to as interest assets. From England, it is called interest margin , or net interest margin.
The size of interest depends on the interest rate, the size of the capital and the time horizon for which the given liability is made available. In addition to the above, we also include the method of determining interest data. In practice, the adopted interest rate calculation calendar is also significant, which specifies such aspects as: the number of days in a given calendar year, which was used for the calculations made. Pursuant to Article 52 of the Banking Act, the number of days in a calendar year for interest calculated from funds in bank accounts is 365 days, however, this value may change, in accordance with the content of the agreement concluded between the bank and a given Client. There is no method for determining interest in Polish banking law, which is why the above issue is subject to direct regulation on the agreement between the bank and the client.
Ways to determine interest
The methods for determining interest are:
- Calculation of capital in proportion to the time horizon of interest rates, charged after they are calculated (from below) – simple interest,
- Calculation of interest accrued after a specified period is added to capital, after the next period interest is calculated on their total amount – compound interest,
- Continuous charging, applicable, for example, in the valuation of derivative instruments (options, futures contracts, etc.) – continuous interest,
- Calculation, in such a way that interest is calculated and charged in advance – a discount.