Flat or Nominal interest rate is defined as a stated interest rate. This interest works according to the simple interest and does not take into account the compounding periods.
Effective interest rate is the one which caters to the compounding periods during a payment plan. It is used to compare the annual interest between funding with different compounding periods like week, month, year etc.
In general stated or nominal interest rate is less than the effective one. And the latter depicts the true picture of financial payments. Therefore, it is important to look at the effective interest rate when deciding to accept an offer to get funds or when investing.
To make matters less confusing for issuers, it may be simpler to look at the monthly repayment amount based on the rates offered to decide if the business cash flow is sufficient to repay the funding.
Probability of Default or PD in short is lifted from the Credit Bureau Malaysia (CBM) report which Fundaztic.com uses as part of its credit evaluation process. The PD is calculated using statistically valid models developed specifically for the Malaysian SME environment. The definition of “Default” is based on guidelines from Basel II and defined as EITHER past due more than 90 days on any financial credit facility OR considered unlikely to pay an existing credit facility in full. There are various event triggers that are used to determine how unlikely the credit will be paid in full.
As a summary, the PD may be used to gauge the likelihood of the particular credit (or note in the case of Fundaztic.com) of the SME turning default within the next 12 months based on information received from a range of business information databases. Therefore, a PD of 12% means the particular note has a 12% likelihood of defaulting within the next 12 months. In other words, this means, the lower the PD, the lower the risk and the better the grade.
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