Q.Distinguish between gross interest and net interest, listing the components that make up gross interest.

Gross interest is the full amount a lender actually receives; net interest is only the pure payment for the USE of capital, once the other components are stripped out.

Gross interest is the FULL amount of interest a lender actually receives from a borrower. It is not a single, pure payment but a bundle of at least three distinct elements:

1. Net (pure) interest — the payment made purely for the SERVICE of capital, i.e. what would be charged even on a perfectly safe, perfectly convenient loan with no risk and no administrative trouble at all.
2. Payment for risk — compensation for the possibility that the borrower may default and fail to repay.
3. Payment for inconvenience — compensation for the trouble of managing/administering the loan, and for the LOSS OF LIQUIDITY the lender suffers by not having that money available for other purposes while it is lent out. …