Module IV· InterestBasic
Question
How do you correctly calculate the interest expense on a term loan?
Answer
Formula
```
Interest = Average Outstanding Balance × (Reference Rate + Spread)
Average = (Year-Begin + Year-End) / 2
```
Example
TLB $200m → $178m, SOFR 3.5% + 425bps:
- Average: (200 + 178) / 2 = $189m
- All-in coupon: 7.75%
- Interest: 189 × 7.75% = $14.65m
Common pitfalls
- Assuming the year-begin balance → understated interest
- Year-end → overstated
- Reset the floating rate quarterly (models often simplify to annual)
Pitch tip
'Interest on the RCF?' → Daily-weighted average for volatile drawdowns.