Cash interest is the amount of cash that accumulates on an interest bearing account over time and is eventually paid out to the investor who owns that account. The rate at which the interest accrues depends on the structure of the account itself and the rate of interest that is applied to the balance found within that account. Interest accounts may be structured to provide cash interest based on a fixed interest rate, or on a rate that floats or varies based on the current prevailing interest rate in the nation where the account is based.
There are several factors that will impact the amount of cash interest that is generated. One has to do with the current balance found in the account. This is because the interest is calculated based on the amount of funds found in the account in question. Typically, the higher the account balance that is present in the account on the date that the interest is calculated, the higher the amount of interest that is earned on that balance.
Along with the account balance, the rate of interest that is relevant to the account will also impact the amount of cash interest that is realized. Some interest bearing accounts are structured with a fixed rate of interest that remains the same from one year to the next. This approach makes the accounting process very simple, since the account balance is multiplied by the interest rate in order to determine how much interest the account holder has earned for the most recently completed accounting period. Other accounts are structured with a variable or floating rate of interest that is based on the national average interest rate that currently prevails within the economy. Often, this variable rate is within a couple of points of that national average rate and will shift slightly from one accounting period to the next.
Cash interest payments may be forwarded to the account holder in a couple of different ways. One approach is to actually issue the holder a check or similar financial instrument for the amount of interest accrued during the most recently completed period. Another approach is to deposit the cash interest directly into the interest-bearing account, a strategy that helps to incrementally increase the balance of that account for the future. In both scenarios, there is a good chance that the cash interest is taxable, making it necessary to account for the exact amount when filing taxes with national and local tax agencies.
