FAI finances

[Stuttgart88]

Doesnt Bray have similar debts?

Irish Times article says senior squad still owed €900k.

[osarusan]

I'm sure this will all be cleared up to everybody's satisfaction at the AGM, as it is every year.

[Charlie Darwin]

Doesnt Bray have similar debts?

Irish Times article says senior squad still owed €900k.

The senior squad bonuses was covered a few weeks ago by the Sunday Times. Apparently the players aren't pushing it.

[gastric]

I'm sure this will all be cleared up to everybody's satisfaction at the AGM, as it is every year.

And why the obsession with supposedly paying off the debt by 2020?

[BonnieShels]

This oft quoted €5m "spent on interest and other service charges on that debt"; I that assume includes principal? Otherwise that's loan-shark territory.

[wonder88]

50m loan at 10% per annum would give the 5 million figure. Private equity firms often charge rates and fees of around 10%. The "debt free by 2020" is the target set by the FAI themselves, so that after that date Lansdowne Road would be a major source of revenue for Irish soccer.

[paul_oshea]

That's not quite right, its compound interest, you are missing a few sums there. Its not an interest free loan set at 50mil.

[Stuttgart88]

True, but I seriously doubt that in this instance the rate is 10%. That'd be seriously distressed territory. There's physical collateral providing security although a share in the Aviva would have a very limited range of potential buyers! The likely stream of revenue from UEFA would make a loan to FAI a reasonably respectable creditor. My guess is the effective rate is closer to 5-6% and the UEFA payments are part of the security package.

I know Desmond is no mug and I doubt there's any philanthropic element to his participation on the FAI loan but I'd love to see so e kind of gesture like him buying out the FAI and then leasing the stadium back. Net net maybe the refinancing he arranged has had a similar impact on the FAI.

[Stuttgart88]

That's not quite right, its compound interest, you are missing a few sums there. Its not an interest free loan set at 50mil.

Really? 50mm at 5% pa = 5mm!

It'd be highly unlikely such a loan would be what they call "interest only" though. I suspect that's what you were trying to say.!

More realistically there's a repayment schedule just like a regular mortgage loan where the regular instalments include an element of both interest and principal. In the early years of a fixed rate amortising loan the bulk of the payments are interest rather than principal, so realistically the FAI has made little enough headway into paying down the loan, other than what was written off in the refinancing of the Danske loan.

The key is whether the loan amortises to zero, I.e., all the principal is repaid by the end of its term or whether it's repaid to something like 30-40pc of its original value, with a view to a new loan being taken out at maturity to refinance the outstanding amount of the old loan.

There is only ever compound interest in a loan if the borrower misses out on his repayments.

[Charlie Darwin]

There is only ever compound interest in a loan if the borrower misses out on his repayments.

Huh? Compound interest is standard in almost every loan.

[Stuttgart88]

Compound Interest by definition is interest on interest, no?

In interest only loans the interest payment is calculated flat. In an amortising loan the way the interest and principal schedules are determined is somewhat complicated, although easy enough to do on Excel. So, in a fixed rate mortgage loan you would typically have a fixed periodic payment. In the early years this is mainly interest with a bit of principal, but in the later years it's the other way around.

But I don't think this is the same as compounding interest though, or is it? The interest is still calculated on a simple basis not a compound basis.

Check this out

http://www.amortization.com/understanding.htm

And then, more tellingly, this, which is part of the same article

http://www.amortization.com/monthly_compounding.htm


Anyway, Paul's point (I'd say) is that it's unlikely the loan is a simple non-amortising loan, what's known as a bullet loan

http://en.m.wikipedia.org/wiki/Bullet_loan

If that was his point, I'd agree!

[Charlie Darwin]

No, compound interest is interest on the principal.

I get a loan of €1000 at 10% interest.

After one year, the principal is €1100. I pay off my agreed interest payment of €200, so the principal is now €900.

After two years, the principal at 10% interest is now €990. I haven't missed a payment but I am paying compound interest of 10% every year.

edit: I'm not using the word principal strictly correctly there but you get the point.

[Stuttgart88]

Yes, I get the point but the rub is exactly what you said, you're not strictly speaking using the term principal correctly. In your example you are simultaneously capitalising interest and paying the interest off. So you're compounding the interest but for zero days! The actual interest you're paying is still effectively calculated on a simple basis.

You say above you agree to pay interest of 200 after year one. But that would imply interest of 20%! What you're saying is that you agree a repayment of 200, made up of interest of 100 and principal of 100. The effect is that over time you probably pay as much in interest as you do in actual principal (which is where it feels like there's a compounding going on) but the way I conceptualise it is still in terms of simple interest. You would only ever pay compound interest if at some point your repayment is less than the rate of interest accrued over that period. Or put another way, in working out a annuity payment at all times the interest component is still a simple rate of interest applied to the principal outstanding in the previous period.

By definition, compound interest is interest on interest! I can see no other way of describing it.

http://www.investopedia.com/terms/c/...ndinterest.asp

[Charlie Darwin]

You have it completely arseways. You're confusing interest with the repayment - if all you do is repay the interest you'll never close the loan book. The first line of the link you posted states it clearly: compound interest is interest on the principal plus the accrued interest.

What you've basically done is take compound interest and renamed it "simple interest" for no apparent reason.

[Stuttgart88]

No, I haven't got it arseways and I am not confusing interest with the repayment!

I explained how a fixed repayment amount includes both principal and interest and how the early years is mainly interest and the later years is mainly principal. Look up any definition anywhere of compound interest and you'll find it is "interest on interest"! Accrued interest is simple interest unless you fail to pay some interest. If interest is unpaid, you pay interest on the unpaid interest I.e., it compounds but by accruing additional interest to the original interest. Another way of saying this is that the interest is capitalised, ie., it is added to the principal so the unpaid interest also starts accruing interest.

In your example above you borrow 1000 at 10pc p.a. At the end of year 1 your interest bill is 100. You pay this off plus whatever principal you have agreed to repay. In your example you have agreed to pay 200 annually. So you pay 200 in total, which is 100 of interest and 100 of principal.

At the start of year two you have an outstanding principal of 900 and at the end of year two the interest that has accrued is 90. But you have agreed to repay 200 per year, so at the end of year 2 you repay 90 in interest and 110 in principal.

At the start of year 3 you have an outstanding loan of 790. By the end of year 3 you have clocked up interest of 79. You have agreed an annual instalment of 200 so you pay this 79 plus 121 of principal.

At the start of year 4 you now have principal of 669. And so on! I don't have a calculator but using pen and paper it looks to me like you would have repaid your loan in full in 7 and a bit years.

Over this time you will have paid 457 in interest.

The average life of the loan is 4.57 years (sum of the annual amounts outstanding after the annual repayment, divided by original principal) = 4.57.

By wonderful symmetry the interest paid in total is 1000 * 10% * 4.57.

So, simple interest is paid despite the loan being an amortising loan that repays principal.

Another angle: By the end of the loan period I'll have paid a shed load of interest and all my principal. The shed load of interest is only ever calculated on a simple basis though. But the fact that it's a lot of interest makes it feel as if there must be compounding. But there isn't if you strip everything down to first principles.

How do you determine what the annual total payment is, I.e., the 200 plucked from the air in our example.

I don't have excel in front of me but I think you use the PMT formula where you can input the starting amount of the loan, the life of the loan expressed in the same units as the frequency of repayments (in our example = number of years which we didn't specify! but it could be monthly or quarterly or annually), the final amount of the loan (for a mortgage this would be zero), the annual rate of interest and the frequency of payment (in our example this is annually). You solve for PMT by inputting the other factors.

The answer is determined by an underlying formula which you can find online.

See here for example

http://www.ruralfinance.org/fileadmi...rest_rates.pdf

There is an inherent compounding in arriving at the regular instalment above the line , but there is a simultaneous decompounding below the line!

In the sequential example above at no point is the interest paid less than the interest accrued, so no interest is charged on interest, so no compound interest is charged.

A mortgage loan or the type of loan the FAI has is very different to a credit card debt which will accrue interest on a compounded basis. Interest will clock up at a huge rate if you don't meet your payments.

[Stuttgart88]

You have it completely arseways. You're confusing interest with the repayment - if all you do is repay the interest you'll never close the loan book. The first line of the link you posted states it clearly: compound interest is interest on the principal plus the accrued interest.

What you've basically done is take compound interest and renamed it "simple interest" for no apparent reason.

are you referring to my post number 293? Read it again

I think you're confusing accruing with compounding.

If I put money, say one unit of money, on deposit at rate of interest n%, at the end of year one my money is 1+n. I have accrued n in interest. The bank credits my account with n and adds it to the 1. If I choose to leave 1+n on deposit for another year at n% I will accrue further interest and by the end of year two I will have (1+n)^2 in my account. I.e., the original n will be compounded. Regardless of whether I leave my earned interest n on deposit whatever amount I have in my account at the start of year two will continue to accrue interest at a rate of n% per annum. But it is only accurate to say I am compounding interest if I leave my n on deposit during year 2. The same works if it's a liability, not an asset.

[paul_oshea]

He said his actions were "against the GAA" and not Garth Brooks. Soccer head, typical anti-GAA. All those soccer barstoolers.

Stutts remind me never to loan you money :P

[Stuttgart88]

Jeez, I have wasted an hour of my life explaining how a mortgage loan works and yet Paul thanks CD for his totally and utterly incorrect post above and neither has the decency to go uh, yeah, I think you're right.

I'm going off to start my own forum with TOWK who has been right about you lot all along.

[BonnieShels]

No, I haven't got it arseways and I am not confusing interest with the repayment!

I explained how a fixed repayment amount includes both principal and interest and how the early years is mainly interest and the later years is mainly principal. Look up any definition anywhere of compound interest and you'll find it is "interest on interest"! Accrued interest is simple interest unless you fail to pay some interest. If interest is unpaid, you pay interest on the unpaid interest I.e., it compounds but by accruing additional interest to the original interest. Another way of saying this is that the interest is capitalised, ie., it is added to the principal so the unpaid interest also starts accruing interest.

In your example above you borrow 1000 at 10pc p.a. At the end of year 1 your interest bill is 100. You pay this off plus whatever principal you have agreed to repay. In your example you have agreed to pay 200 annually. So you pay 200 in total, which is 100 of interest and 100 of principal.

At the start of year two you have an outstanding principal of 900 and at the end of year two the interest that has accrued is 90. But you have agreed to repay 200 per year, so at the end of year 2 you repay 90 in interest and 110 in principal.

At the start of year 3 you have an outstanding loan of 790. By the end of year 3 you have clocked up interest of 79. You have agreed an annual instalment of 200 so you pay this 79 plus 121 of principal.

At the start of year 4 you now have principal of 669. And so on! I don't have a calculator but using pen and paper it looks to me like you would have repaid your loan in full in 7 and a bit years.

Over this time you will have paid 457 in interest.

The average life of the loan is 4.57 years (sum of the annual amounts outstanding after the annual repayment, divided by original principal) = 4.57.

By wonderful symmetry the interest paid in total is 1000 * 10% * 4.57.

So, simple interest is paid despite the loan being an amortising loan that repays principal.

Another angle: By the end of the loan period I'll have paid a shed load of interest and all my principal. The shed load of interest is only ever calculated on a simple basis though. But the fact that it's a lot of interest makes it feel as if there must be compounding. But there isn't if you strip everything down to first principles.

How do you determine what the annual total payment is, I.e., the 200 plucked from the air in our example.

I don't have excel in front of me but I think you use the PMT formula where you can input the starting amount of the loan, the life of the loan expressed in the same units as the frequency of repayments (in our example = number of years which we didn't specify! but it could be monthly or quarterly or annually), the final amount of the loan (for a mortgage this would be zero), the annual rate of interest and the frequency of payment (in our example this is annually). You solve for PMT by inputting the other factors.

The answer is determined by an underlying formula which you can find online.

See here for example

http://www.ruralfinance.org/fileadmi...rest_rates.pdf

There is an inherent compounding in arriving at the regular instalment above the line , but there is a simultaneous decompounding below the line!

In the sequential example above at no point is the interest paid less than the interest accrued, so no interest is charged on interest, so no compound interest is charged.

A mortgage loan or the type of loan the FAI has is very different to a credit card debt which will accrue interest on a compounded basis. Interest will clock up at a huge rate if you don't meet your payments.

In the 5 and a half years I've been wandering through these halls this is up there with the greatest posts of all time.

Given I know what Stutts does in real life, I would have no doubts with his "Danny-esque" response.

Otherwise he's been swiping money for nothing all this time.

[BonnieShels]

Jeez, I have wasted an hour of my life explaining how a mortgage loan works and yet Paul thanks CD for his totally and utterly incorrect post above and neither has the decency to go uh, yeah, I think you're right.

I'm going off to start my own forum with TOWK who has been right about you lot all along.