Q.Explain the features of Interest.

Interest is the fixed periodic payment a company makes to its lenders and creditors (debentureholders, depositors, banks) as the cost of borrowed capital. It is a compulsory charge against profit, paid at a fixed rate whether or not the company earns profit.

Interest is the price paid by a company for the use of borrowed funds. Whenever a company raises money through debentures, deposits or loans, it must pay interest to the lenders as a reward for lending. Its main features are:

• Charge against profit: Interest is treated as an expense and is a charge against profit. It is deducted before arriving at net profit, unlike dividend which is an appropriation of profit.
• Paid to creditors: Interest is paid to the creditors of the company — debentureholders, depositors and lenders — who are not owners of the company.
• Fixed rate: Interest is paid at a fixed, pre-determined rate agreed at the time of borrowing (for example, a stated coupon rate on debentures).
• Compulsory and contractual obligation: Payment of interest is a legal and contractual obligation. It must be paid on the due date whether or not the company makes a profit.
• Payable even in loss: Since it is a charge and not an appropriation, interest is payable even if the company incurs a loss. …