Forums Support Library EPT – Estate Planning Tools SCIN: Splitting Risk Premium between Principal and Interest

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    • Keith
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      Theoretically, some appropriately weighted combination of principal risk premium and interest risk premium would be acceptable. A weighted-combination risk premium may be determined using the template in a two-step fashion. First, compute the principal risk premium and interest rate risk premium using the appropriate market rate of interest. Second, choose an interest rate somewhere between the market rate and the risk-premium-adjusted interest rate computed in the first pass and enter it as the market rate of interest in the data input section (leave the §7520 rate as it is). The resulting principal risk premium will be lowerthan that computed originally using the market rate of interest. The summary statement and repayment schedule for the installment note with principal risk premium will now reflect the combined risk premiums. The interest rate premium is equal to the difference between the market rate and the second (higher) rate entered. The revised and lower principal risk premium is reflected on the summary statement. The repayment schedule will show the effects of each risk premium in the allocation of interest, gains, and basis recovery.

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