U.S. Department of Energy - Energy Efficiency and Renewable Energy

Federal Energy Management Program

Using Annual Payments to Decrease the Total Interest Paid

The annual payment option allows the government to pay for an entire fiscal year (12 months) of payments in advance. This method is attractive to finance companies and may also fit Federal budget and finance constraints, saving the government a substantial amount of interest expense.

Savings are generated because the financing is amortized quicker, and less interest accrues over the term of the project financing. But note one important feature: the interest rate used for a monthly amortization is lower than that used for an annual amortization (mathematically known as the bond equivalent yield). However, even with the slightly increased interest rate, interest payments over the payment period are less than monthly payments. The net effect is that total interest payments decrease, depending on the term, by 8% to 14%. In some cases, finance companies prefer that the annual payment be made on December 1, so they are assured that the agency will have received its annual appropriation.

The two examples show approximate savings for different amounts and contract periods.