What is Net Interest Cost (NIC)?
Net interest cost (NIC) is a way to compute the average annual interest expense for a bond issue.
How Does Net Interest Cost (NIC) Work?
The formula for net interest cost is:
Net Interest Cost = (Total Interest Payments + Discount - Premium) / Number of Bond-Year Dollars
The "number of bond-year dollars" equals the sum of the product of each year's maturity value and the number of years to its maturity.
For example, let's assume Company XYZ wants to calculate the NIC on its most recent bond issue. If the total interest payments on the debt total $4,000,000, the premium was $250,000, and the number of bond-year dollars is $100,000,000, then using the formula above, the NIC is:
NIC = ($4,000,000 - $250,000) / $100,000,000 = .0375 or 3.75%
NIC is expressed as a percentage. note that net interest cost does not incorporate the time value of money. To take the time value of money into account, you need to use the "true interest cost" method, also called the "present worth" method.
Why Does Net Interest Cost (NIC) Matter?
When companies issue bonds, they usually sell the bonds to a syndicate of underwriters, who in turn sell the bonds to the public. Thus, companies shop around for the best price from underwriters -- that is, the one that produces the least interest cost over the life of the loan. NIC is used as one way to compare bids from the underwriters. But it's not the only way. Because NIC doesn't incorporate the time value of money, other measures can provide useful information about the quality of an underwriter's bid.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Each week, one of our investing experts answers a reader's question in our InvestingAnswers' Q&A column. It's all part of our mission to help consumers...Read More →