Blended Interest Rate Calculation for Collateralized Lending
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Solution Overview
Problem
Existing collateralized lending systems often set interest rates based on collateral type without correlation, leading to suboptimal borrowing terms for borrowers.
Innovation Solution
A method to determine interest rates by grouping collateral assets by class, allocating a debit amount based on market values, and calculating a blended interest rate for optimized lending transactions.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Ease of operation
If interest rates are set uniformly without considering collateral quality, then the system is simple to operate, but borrowers do not receive optimized borrowing terms
Solution Approach 1:
The patent applies local quality by assigning different interest rates to different asset classes based on their specific characteristics and risk profiles. Instead of a uniform interest rate, the system tailors the interest rate to each local segment (asset class), thereby optimizing borrowing terms for each type of collateral while maintaining manageable complexity through standardization within each class.
Solution Approach 2:
The system changes the interest rate parameter based on the asset class being collateralized. By adjusting this key parameter according to the quality and type of collateral, the system achieves optimized borrowing terms without requiring complex individual assessments of each asset, thus balancing simplicity and optimization.
2Productivity
If interest rates are correlated with collateral quality, then borrowers receive optimized borrowing terms, but the system complexity increases
Solution Approach 1:
The patent segments the collateral assets into distinct asset classes (e.g., equities, fixed income, commodities) and assigns interest rates at the class level rather than individually for each asset. This segmentation reduces system complexity by grouping similar assets together while still achieving optimization through differentiated rates for different classes, thus balancing complexity and effectiveness.
Solution Approach 2:
The system implements parameter changes by establishing a structured framework where interest rates are adjusted based on asset class characteristics. This approach achieves borrowing term optimization through systematic parameter adjustment rather than complex individualized assessments, thereby managing system complexity while maintaining optimization benefits.
3Device complexity
If debit amount is allocated without considering market values, then the calculation process is simpler, but the interest rate allocation does not reflect actual collateral contribution
Solution Approach 1:
The patent incorporates market value as a key parameter in the debit allocation process. By using market values to determine the proportion of debit amount allocated to each asset class, the system achieves precise measurement of collateral contribution. The complexity introduced is offset by the use of readily available market data and standardized calculation methods.
Data Source
AI summary
A method of determining an interest rate to be applied against a debit amount in a collateralized lending transaction. The method includes identifying a plurality of assets to be used as collateral, grouping the assets by class, and assigning an interest rate to each class of assets. The method also includes allocating the debit amount to each of the asset classes based on market values of the assets, calculating a blended interest rate based on the allocated debit amounts, and applying the blended interest rate to the debit amount to determine the accrual amount due on the debit amount.