The growing inflationary process has introduced into banking operations a varied number of instruments that attempt to correct the monetary distortions produced by that process, both in capital and in interest. For that reason, it has seemed necessary to clarify certain essential concepts that are especially important in financial decision-making. To that end, three topics will be developed:
- The concept of nominal, effective, and real interest rates
- The methodology of indexation
- Comparison with non-indexed systems. Conclusions.
Concept of nominal, effective and real interest rates
The nominal interest rate is the one literally stated in the agreement and measures the amount of money resulting per unit of time when a unit of capital is used. When referring to the nominal rate, it should not be forgotten that it actually includes other elements beyond the simple return or financial cost of placing or borrowing money. Among them, the following may be distinguished:
a) The intrinsic interest rate (ip)
b) The administrative cost rate (ic)
c) The operational risk rate (ir)
d) The real interest rate (r).
A table is included for illustrative purposes showing the relationship between the equivalence of the rates mentioned above. The intrinsic interest rate is reflected in a variation of capital in terms of goods, due to an intrinsic characteristic of those goods. It represents an economic concept, and its study falls outside the general scope of this work. The administrative cost rate represents, for the creditor, the expenses of managing the account, and for the debtor, those necessary to obtain financial assistance, such as stamp duties, commissions, and similar charges. The operational risk rate estimates the probability of collection of the account. The real interest rate measures, in constant currency terms, the result of a given financial operation. In accordance with the above, the determination of the nominal rate must be understood in that context.
When speaking of the real rate, reference is made to the nominal interest rate adjusted by removing the rate of currency devaluation during the same period. It should be noted here that this devaluation rate arises from the use of effective indexes for the period for which it is calculated. Therefore, in order to make homogeneous comparisons, one must work with the effective rate corresponding to the nominal periodic or proportional rate being used. If we consider Data Table I, we find that for the period from moment 0 to moment 1, there is a devaluation rate (t), expressed as a decimal, of 0.05, corresponding to an effective interest rate (i’), expressed in the same way, of 0.605. If we wish to obtain these indicators for the period from moment 0 to moment 6, we would find a devaluation rate (t) of 0.3918 and an effective interest rate
Suretyship
It is one of the most common typical forms of personal guarantees. Under Argentine law, there is suretyship when one of the parties has undertaken an accessory obligation for a third party and the creditor of that third party has accepted that accessory obligation. From this it follows that it is an accessory contract, that is, it presupposes the existence of a principal obligation to which the obligation of the guarantor is subordinated. As a general rule, all persons with capacity to contract may act as guarantors, except in certain specific cases. Companies may also act as guarantors, but it is necessary that their bylaws permit it and that their administrators have special powers to grant this guarantee on behalf of the company.
The object of a suretyship may be broad, even extending to guarantee the performance of contingent obligations, without it being necessary for the suretyship to have a determined amount. In other words, the use of this guarantee sometimes offers banks considerable flexibility in securing compliance with clauses that do not involve obligations to pay sums of money, but that, as in the case of investment projects, may require fulfillment of other conditions connected with the principal obligation. A characteristic of this contract, which must be taken into account in cases such as the one described and which has sometimes given rise to difficulties, is that the principal obligation sets the maximum limit of the suretyship, and the guarantor may bind himself for the same amount or for less, but never for more, since in that case he would exceed the extent of the obligation assumed by the original liable party.
Because it is, as already stated, an accessory obligation, the bank must make a judicial demand upon the borrower and, if the latter does not comply, it may then proceed both against the borrower and against the guarantor. If it is the guarantor who makes the payment, he may then take action against the debtor for the amount of the debt, the interest, and the expenses incurred. In civil matters, where there are several guarantors, each guarantor is only obliged to pay his share, but if the obligation was assumed jointly and severally, the creditor may proceed directly against the guarantor without the need to first execute the debtor’s assets and may claim the full amount from any one of the guarantors.