Contractual Cash Flows

From Open Risk Manual


For any financial contract, Contractual Cash Flows (also Scheduled Cashflows) denotes the cash (money) exchanges between the contracting parties as stipulated in the contract documentation (loan agreement, term-sheet, prospectus etc.)

Broadly speaking financial contracts can be separated into two major categories

  • where cash flows are not certain and not specified in detail (Equity / Share like instruments)
  • where cash flows have a large degree of certainty and specified in some detail (Fixed Income like instruments), even though they might not be deterministic (fully specified) - e.g. may depend on interest rate benchmarks

Debt Instrument Cashflows

For debt instruments there is standard separation of cashflows into principal repayment and interest payment cashflows. This is primarily

Principal Repayment Cashflows

Principal repayment cashflows denotes the precise scedule by which the originally borrowed amount (Principal) is repaid over a period of time. Potential repayment options include:

  • Linear amortization
  • Annuity style amortization (including interest payments)
  • Final lump sum (balloon payment)
  • Custom profile

Interest Payment Cashflows

Interest payment cashflows denotes the precise schedule by which interest on the originally borrowed amount (Principal) is paid over a period of time. Potential repayment options include

  • No interest (for a certain period)
  • Regular interest payment (applied on remaining outstanding principal)
  • Custom profile

Fixed Interest Schedule

Where the interest rate is fixed for the duration of the loan

Floating Interest Schedule

In the case of floating interest schedule, the interest on the loan is paid periodically (monthly, quarterly) at a rate specified relative to some reference rate. Loans with floating-rate interest rate payments involve thus cashflows whose absolute values are not known with certainty except until the next interest rate reset.

Example: LIBOR + 250 basis points (L + 250 bp)

Mixed Schedules

Where the nature of the interest rate payments switches between fixed and floating, possibly depending (being contingent) on the realisation of various events

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