Module VI· Interest Calculation MechanicsBasic
Question

On which balance do you calculate interest: beginning, ending, or average?

Answer

Beginning balance is simple and avoids circularity. Ending balance reflects repayments but can create circularity if cash sweep depends on interest. Average balance is usually most accurate because debt changes during the period, but may require iteration or a circularity switch. Banker models often use average balance with iteration or beginning balance for simplicity.