FAI finances

[paul_oshea]

He doesn't do anything like what you think he does.that's all done for him by people like me

[Stuttgart88]

My real concern is how much CD has clocked up on credit card debts!

And Paul don't worry: I wouldn't lend you any money.

[BonnieShels]

He doesn't do anything like what you think he does.that's all done for him by people like me

You implying those in senior roles are there for reasons other than ability?

And Paul don't worry: I wouldn't lend you any money.

Is he allowed get loans based as part of his roots in Roscommonism?

[paul_oshea]

ability in delegation. but in this instance it's not that.

and stutts don't steal and try and reuse my joke.

[BonnieShels]

ability in delegation. but in this instance it's not that.

and stutts don't steal and try and reuse my joke.

He merely delegated it's use to you.

[Charlie Darwin]

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.

You've entered into a dangerous amount of sophistry here. I can't put it more simply than this:

Simple interest is interest on the principal. Compound interest is interest on the principal plus accrued interest. There is really no way to credibly deny that.

It pains me to agree with Paul O'Shea but it has to be done in this instance.

[Stuttgart88]

Not even a hint of sophistry. There is nothing disingenuous or will fully deceitful here. I'm actually quite a bit insulted by that. I accurately and honestly presented how an amortising loan works, having been told by your good self that under my logic a loan would never get repaid, it'd only ever pay off interest. I showed exactly how a loan gets repaid without any hint of compound interest.

You say compound interest is interest on the principal plus accrued interest. I presume you mean interest on (principal plus accrued interest). Interest always accrues on principal, that's a given. We both agree that.

But how does interest accrue on already accrued interest? Only if you have not paid the interest. I.e., you have rolled it up, or capitalised it.

If you pay your interest bill on time you do not end up paying compound interest.

Just as interest compounds on a deposit if you leave your earned - and credited - interest in your account. I.e., once your interest is paid, it becomes part of the principal amount that starts earning interest in the next period, you start earning interest on interest, so to speak, plus interest on the original principal too), if you have a loan you only start paying interest on interest owed if you don't pay your interest on time. If you miss your interest, you get charged interest on that interest. The unpaid interest is added to the principal and your total liability gets higher, which is where the notion of compounding comes into it. The more you miss paying, the faster your liability grows. It spirals, which is why the term "compounding" is apt.

Can we go back to the original root here:

It was said above that a 50mm loan with a 5mm interest bill would imply a 10pc interest rate. Rather usurous but not uncommon in private equity circles.

Paul said no that's too simplistic because all kinds of compounding etc must be taken account of too.

I said no, strictly speaking compounding isn't a factor, but debt servicing includes principal plus interest so my guess was that the 5mm includes principal repayments plus interest. I qualified what Paul was saying, and put it more accurately without disagreeing with his general point, which is that t's too simple to conclude that 10pc is the rate they are paying.

You then said almost all loans clock up interest on a compounded basis. Credit card debts do (well actually, again only if you don't pay, but credit cards usually demand monthly payment, a bank loan to a company is usually quarterly or even similar-annually; overdrafts are different) but I hope that the FAI does not use a credit card to pay for the Aviva, otherwise we're all goosed. But long term bank loans and mortgage loans don't involve compound interest. Of course there WILL be a provision in the documentation that says what happens if payments are missed.

More realistically the FAI have an agreed payment schedule with their new lenders. It could be that in the early years they pay only interest , no principal, but we don't know. I have no doubt they were compounding interest to Danske because they were clearly in arrears and Danske had to take a substantial write down. We weren't talking about that though.

So, to reiterate: if a borrower is meeting his payments on time he gets charged interest on a simple basis. If a borrower fails to meet his payment schedule, the unpaid interest gets added to the outstanding principal and gets charged interest on that too. That's when compounding comes in. It's not uncommon for this "extra" interest to get charged at a penalty rate.

I'm just trying to spell things out. It's not really that big a deal, but instead of allowing me to politely contradict Paul - always worthwhile - you've decided to jump down my throat saying I have got it arseways and I'm a sophist.

I was expecting you might even appreciate the effort I went to to show you how an amortising / mortgage loan works, how interest dominates the early payments but principal the later payments etc., but no, I was mistaken.

[Stuttgart88]

Simple interest is interest on the principal. Compound interest is interest on the principal plus accrued interest. There is really no way to credibly deny that.
.

i'm not denying that. It'd be sophistry to suggest that I am.

I'm only saying that interest on accrued interest only gets charged if you haven't paid the interest.

[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.

Who suggested it was an interest free loan? I didn't see that hinted at anywhere above.

I do agree that W88 is probably missing a few sums, I.e., that the 5mm probably includes principal. I think in his hurry, Paul meant to say it's not an interest only loan. I'd have agreed, and effectively said that.

I don't agree that it's compound interest.

[Charlie Darwin]

Sophistry is probably the wrong word but I think you're engaging in mental gymnastics to justify a pointless and unhelpful distinction you've made for reasons that aren't entirely obvious. You're correct that interest is only properly compounded when the repayment is lower than the normally-accruing interest, but that doesn't negate the fact that the compound interest is the mechanism that is being used regardless of whether you keep up with your payments or not. If you make your mortgage payments every month until it's paid off, you may have avoided having your interest compounded but it's still a compound interest loan.

You might not agree that it's compound interest but it's not your decision to make.

[paul_oshea]

There's been a few wrong words CD, hasn't there?

I know where the problem lies between both of you, and it could be what stutts mentioned about autism, two parrallel lanes going along but never diverging.

I know what Stutts was trying to say but he clearly missed the original post and the 50mil. When you pay an amortizing loan off it gives you the final full sum, thats what stutts was getting mixed up on the 50 mil, and hence he has included it all in, so 10 payments at 5 mil a payment would have the whole lot paid off.

It pains me to have to see that CD has finally seen who is the superior intellect and had to agree, when it comes to sums, most fall by the way side to be fair. I'd rather he had got it wrong.

[osarusan]

Cracking stuff lads.

[Stuttgart88]

Look, if the accusation is that I'm well and truly on the autistic spectrum you'll have no quarrel there. I haven't a leg to stand on based on my contributions above.

I stand my ground on compound interest, however. The purpose of questioning it in the first place was to politely point out that Paul was wrong in what he said, but probably right in what he meant to say.

Paul, parallel lines are lines that never converge. They always diverge. Did I miss something?

[paul_oshea]

Nope not at all, thats exactly it running along, but never moving off course, never diverging off the same straight line - but still in parallel ; )

[BonnieShels]

Nope not at all, thats exactly it running along, but never moving off course, never diverging off the same straight line - but still in parallel ; )

You can't use parallel in the explanation of parallel Paul. Tut tut.

Though there's an interesting science regarding parallel lines and that there is a theory that at some point they do converge.

*opens can of worms*

[paul_oshea]

I'm going to draw a diagram on Monday to aid my poor explanation!!

parallel because they keep the same distance apart at all times but parallel lines can still veer at any angle and change course - but still remaining parallel. what I was trying to say was cd and stutts weren't following this pattern as they never veered off a straight line....Their argument stayed exactly the same with no change or movement away from the kernel of that argument.

cd with his poor choice of words or wrong words as he called them perhaps my illustrated effort was also not the best way of providing a metaphor.

[Charlie Darwin]

Click to expand. Sorry for the NSFW bit.

[NeverFeltBetter]

What? Why would Blatter pay up that kind of cash? What was FAI complaining about that incident achieving, tangibley? Sounds a bit out there.

[osarusan]

Good golly, what a story.

[DannyInvincible]

Click to expand. Sorry for the NSFW bit.

Link to the story online here, although it's blocked to non-subscribers: http://www.thesun.ie/irishsol/homepa...r-Blatter.html

Don't suppose anyone has a subscription?

This article quotes what I imagine are the most important bits: https://uk.eurosport.yahoo.com/news/...2869--sow.html

Henry's intentional handball led directly to the goal which fired France to the 2010 World Cup at Ireland's expense, an act which outraged millions of fans not just in Ireland but around the world.

The FAI was angered, and immediately petitioned FIFA to put things right - suggesting that Ireland might be included at the tournament as a 33rd team.

And the Irish Sun reports that Sepp Blatter's public sniggering at the suggestion first deepened the rift, and led to the compensation:

"Blatter handed Ireland a €5million windfall in a bid to heal the rift over the Thierry Henry ‘Hand of Frog’ scandal — and to get the FAI off his back," the paper reports.

"The money was initially provided as a loan before being converted into a grant.

"FIFA had been expected to consider the extra team plea confidentially and furious FAI boss John Delaney blasted Blatter when he went public. "

The paper quotes a source saying that the money was to "quell the storm" of Irish protest:

"FIFA wanted this row to go away. They feared the FAI delegation could raise the issue at FIFA congress in South Africa deflecting from what should have been a good news story," the source claimed.

"The feeling at the FAI was that Blatter had embarrassed himself... FIFA provided money to try to heal the rift."

The whole episode is a strange one alright, but haven't we come to expect this sort of carry-on from FIFA? And could you imagine the FAI turning down a gift of €5million, corrupt or not? I'm also embarrassed that that completely xenophobic "hand of frog" headline will be quoted globally, as if that's how Irish people commonly refer to the incident.