## Investment Income: Interest, Broken Period Interest & Premium Amortisation
### What is Included in Investment Income?
| Included | Excluded |
|---|---|
| Income from bonds and debentures of corporates | Dividend received from Subsidiaries & JVs |
| Coupon/interest on government securities |
---
### Net Interest Income from Investments
$$\text{Net Interest Income} = \text{Gross Interest Income} - \text{Broken Period Interest Paid} - \text{Amortisation of Premium}$$
---
### Concept 1: Broken Period Interest
When a bank buys a security in the middle of a coupon period, it pays the seller the interest accrued since the last coupon date (this is called broken period interest or accrued interest).
When the next coupon is received, the bank collects the full coupon. But part of that coupon actually belongs to the seller (the prior period accrual). Therefore:
- Broken period interest paid must be deducted from the coupon received.
- Only the remaining amount is the bank's real income.
> Example: Coupon received = Rs 10,000. Broken period interest paid = Rs 3,000 (relates to the period before purchase). Real income = Rs 7,000.
---
### Concept 2: Amortisation of Premium on Investment
When a bank buys a security above its face value (at a premium), the excess paid is not income — it is an additional cost that will be lost at maturity.
The premium is amortised (spread) over the remaining maturity and deducted from interest income each year.
$$\text{Annual Amortisation} = \frac{\text{Premium Paid}}{\text{Remaining Years to Maturity}}$$
Each year, this amount is deducted from interest income to reflect the true economic return.
---
### Profit/Loss on Sale and Revaluation of Investments
- Profit or loss on sale of investments → recognised in P&L (net basis).
- Revaluation of investments: As per RBI guidelines, investments are valued at periodic intervals. Resulting profit/loss is recognised per RBI norms.