TCTM10850 - Interest: Forward Interest - A worked example

You are negotiating a settlement with a person. You have agreed that £4,100 is due. She has no means of paying this in one lump sum so you agree she can pay £100 within 30 days and settle the balance over 24 months. If the interest rate in force at the time is 3% the forward interest is calculated as:

£4000 x 3% x 24/12 x ½ = £120

The total settlement will therefore be £4,220 with £100 payable in 30 days and £4,120 spread over 24 months.