PROJ00041

• Contract/PO #: C153348
• Contractor Name: Morrison, Town of
• Contract Type: Loan
• Water District: 9
• County: Jefferson
• Bill Number: SB 80-67
• Loan Projects - Doc Type: Contract Documents

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ATIACHMENT
Agenda Item 20d
March 9, 1994

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MEMORANDUM

To:

Chuck Lile
John Van Sciver d1)JV5

From:

Date:

December 16, 1993

Subject:

Policy for Dealing with Fixed Interest Payment Loans (FIP Loans)

BACKGROUND

As a part of the Small Dam Site Reconnaissance Study, the issue of Fixed Interest
Payment Loans (FIP loans) has been raised. A Reservoir Company which is interested in
raising an existing dam to increase the storage capacity, already has a loan with the CWCB
because of a previous repair to the same structure. To finance the enlargement they would
again want to borrow from the CWCB, but would need to refinance or consolidate the
existing loan. The only problem is that the existing loan is a Fixed Interest Payment Loan
(FIP Loan).

Definition of a Fixed Interest Payment (FIP) Loan: A FIP Loan is an amortized loan
for which the dollar amount of the interest payment is the same for the entire term
of the loan. The amount of the annual payment applied to interest is the total loan
interest (assuming normal payback over the stated term of the loan), divided by the
term of the loan. For the attached example, total interest for the 40 year loan is
$476,951, and $11,923.78 of each annual payment ($476,951 divided by 40 years) is
arbitrarily defined as interest. The rest of the payment is called principal (in this
case, $16,325.) Although the interest payment stays the same, the effective interest
rate increases over the term of the loan, as the principal balance declines. For the
example, the effective interest rate is 1.8% the first year, and climbs to a whopping
73% the 40th year!

FIP Loans should be compared with Fixed Interest Rate Loans (FIR Loans), which
are typical amortized loans.

Definition of a Fixed Interest Rate (FIR) Loan: A FIR Loan is an amortized loan
for which the interest rate remains the same for the entire term of the loan. The
amount of the annual payment applied to interest in any given year is the stated loan
interest rate times the unpaid balance. For the attached example, the 3% loan with
a remaining unpaid balance of $542,080 in year 12 would have $16,262 interest due
that year ( .03 times $542,080 ) , with the rest of the payment going to reduce the
principal balance. For the same loan in year 37, when the remaining principal