Skip to content
All library documents

How the U.S. Rule Relates to the Actuarial Method

Article Quant Q&A · Author: WebUserLearner
Read the original

Summary

The document raises a distinction between the U.S. Rule and the actuarial method for calculating interest. It questions the idea that the actuarial method compounds unpaid interest while the U.S. Rule never does, citing a lending-computations text that links the two methods and describes the U.S. Rule in terms of how partial payments are allocated between interest and principal.

The cited passage says the actuarial method can calculate an installment rate that satisfies the U.S. Rule, while another passage classifies actuarial calculation as one approach to distributing credit costs during debt amortization. This suggests the terms may refer to related but distinct aspects of a loan calculation. The document does not include a worked example or resolve the terminology; readers would need the source text or other references to establish exactly how the terms are being used.

Key ideas

  • The document questions whether the U.S. Rule and actuarial method are separate or equivalent concepts.
  • The cited text connects the U.S. Rule to the allocation of partial payments between interest and principal.
  • The actuarial method is also described as a way to distribute credit costs during amortization.
  • No worked calculation is provided to settle the apparent terminology conflict.

Tags

Fixed incomeStatistics
Full text
# US Rule versus Actuarial Method for calculating interest


# US Rule versus Actuarial Method for calculating interest












I'm trying to understand the difference between the actuarial method and the U.S. Rule for calculating interest. I think the difference is that the actuarial rule adds unpaid interest to the principal balance and the US Rule does not. So the actuarial rule allows the charging of compound interest.

But I'm reading Neifeld's Guide to Instalment Computations (a book by an economist at a major lender back in the `50s) and it says this:

> “The United States Rule prescribes the actuarial method. The rule is in essence a decision on the application of partial payments, their apportionment between charge and principal being the point at issue. Interest is computed on the unpaid balance, at the stated rate, for the elapsed time; it is equal to the action of the principal for one period multiplied by the stated rate. In instalment repayments, whether a discount or an add-on transaction, the actuarial method computes the rate which meets the condition of the United States Rule.” at 325

The first and last sentence of the above quote really confuses me - it sounds like the actuarial method and US rule are the same thing. But is he using "actuarial method" to refer to something else? For example, on another page in the book (p149), it describes the actuarial method as one of several ways "of distributing the credit cost in the amortization of a debt" (along with the direct ratio method, constant ratio method, and others).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.