An effective interest rate cap: a clarification

[2307.08861] An effective interest rate cap: a clarification Skip to main content Search Submit Donate Log in Search arXiv Press Enter to search · Advanced search Economics > General Economics arXiv:2307.08861 (econ) [Submitted on 17 Jul 2023 ( v1 ), last revised 11 Apr 2026 (this version, v8)] Title: An effective interest rate cap: a clarification Authors: Mikhail V. Sokolov View a PDF of the paper titled An effective interest rate cap: a clarification, by Mikhail V. Sokolov View PDF Abstract: Many countries impose regulatory restrictions on lending rates known as interest rate caps. In most cases, these restrictions apply to the effective (rather than nominal) interest rate, a measure which incorporates all commissions and fees associated with a loan. Because the effective interest rate is the internal rate of return (IRR) of the loan's cash flow stream, this regulatory rule becomes ambiguous for loans that do not have a conventional IRR. This paper resolves this ambiguity. We begin by clarifying the concept of IRR. We axiomatize the conventional definition of IRR (as a unique root of the IRR polynomial) and demonstrate that any extension to a larger domain necessarily violates a natural axiom. Building on this result, we show that there is a unique extension of the interest rate cap to all loans consistent with a set of economically meaningful axioms. The rule we characterize takes the form of a net present value test. This result is general, and applies to any setting where one wishes to extend an IRR-based threshold rule to arbitrary cash flows. Applications include lending and deposit rates regulation, investment screening, and capital budgeting, where the standard decision rule accepts a project if its IRR exceeds the hurdle rate. Comments: 39 pages Subjects: General Economics (econ.GN) ; General Finance (q-fin.GN) Cite as: arXiv:2307.08861 [econ.GN] (or arXiv:2307.08861v8 [econ.GN] for this version) https://doi.org/10.48550/arXiv.2307.08861 Focus to learn more arXiv-issued DOI via DataCite Submission history From: Mikhail Sokolov [ view email ] [v1] Mon, 17 Jul 2023 21:39:41 UTC (1,136 KB) [v2] Sun, 27 Aug 2023 19:23:37 UTC (1,211 KB) [v3] Fri, 22 Sep 2023 20:19:45 UTC (1,233 KB) [v4] Mon, 16 Oct 2023 21:08:37 UTC (1,351 KB) [v5] Sun, 29 Oct 2023 14:27:39 UTC (1,389 KB) [v6] Mon, 13 Nov 2023 15:18:55 UTC (1,388 KB) [v7] Tue, 28 May 2024 09:49:16 UTC (1,617 KB) [v8] Sat, 11 Apr 2026 09:41:37 UTC (1,766 KB) Full-text links: Access Paper: View a PDF of the paper titled An effective interest rate cap: a clarification, by Mikhail V. Sokolov View PDF view license Current browse context: econ.GN < prev | next > new | recent | 2023-07 Change to browse by: econ q-fin q-fin.EC q-fin.GN References & Citations NASA ADS Google Scholar Semantic Scholar export BibTeX citation Loading... BibTeX formatted citation × loading... Data provided by: Bookmark Bibliographic Tools Bibliographic and Citation Tools Bibliographic Explorer Toggle Bibliographic Explorer ( What is the Explorer? ) Connected Papers Toggle Connected Papers ( What is Connected Papers? ) Litmaps Toggle Litmaps ( What is Litmaps? ) scite.ai Toggle scite Smart Citations ( What are Smart Citations? ) Code, Data, Media Code, Data and Media Associated with this Article alphaXiv Toggle alphaXiv ( What is alphaXiv? ) Links to Code Toggle CatalyzeX Code Finder for Papers ( What is CatalyzeX? ) DagsHub Toggle DagsHub ( What is DagsHub? ) GotitPub Toggle Gotit.pub ( What is GotitPub? ) Huggingface Toggle Hugging Face ( What is Huggingface? ) ScienceCast Toggle ScienceCast ( What is ScienceCast? ) Demos Demos Replicate Toggle Replicate ( What is Replicate? ) Spaces Toggle Hugging Face Spaces ( What is Spaces? ) Spaces Toggle TXYZ.AI ( What is TXYZ.AI? ) Related Papers Recommenders and Search Tools Link to Influence Flower Influence Flower ( What are Influence Flowers? ) Core recommender toggle CORE Recommender ( What is CORE? ) Author Venue Institution Topic About arXivLabs arXivLabs: experimental projects with community collaborators arXivLabs is a framework that allows collaborators to develop and share new arXiv features directly on our website. Both individuals and organizations that work with arXivLabs have embraced and accepted our values of openness, community, excellence, and user data privacy. arXiv is committed to these values and only works with partners that adhere to them. Have an idea for a project that will add value for arXiv's community? Learn more about arXivLabs . Which authors of this paper are endorsers? | Disable MathJax ( What is MathJax? ) We gratefully acknowledge support from our major funders , member institutions , , and all contributors. About · Help · Contact · Subscribe · Copyright · Privacy · Accessibility · Operational Status (opens in new tab) Major funding support from

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