> For the complete documentation index, see [llms.txt](https://docs.kuma.bond/kuma-protocol/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.kuma.bond/kuma-protocol/developers/smart-contract-architecture/kuma-interest-bearing-token-kibt/interest-bearing-logic.md).

# Interest Bearing Logic

### Interest Bearing Logic

**Yield**

`yield` is represented as cumulative per-second rate in 27 decimal format. The rate is calculated as follows:

$$yield = 1 + annualRate^{\frac{1}{31536000}} \* 10^{27}$$

`cumulativeYield` represents the aggregate interest accrued over time. It is calculated with a 1-second precision based on the block timestamp. `cumulativeYield` is updated whenever the `_refreshCumulativeYield()` internal function is called, to update the `cumulativeYield` to the current time

`cumulativeYield` is calculated as follows: Cumulative Rate is calculated as:

$$newCumulativeYield = oldCumulativeYield \* (1 + yield)^{elapsedTime}$$

Setting `yield` to `RAY` (1e27) - which is also its initial value at deployment - sets yield to zero. A positive yield will increase the `cumulativeYield` over time.

Here `timeElapsed` refers to the time elapsed between the last `_cumulativeYield` refresh and the current timestamp.

`previousEpochCumulativeYield` also represents the aggregate interest accrued over time with a 1-second precision but is based on the `cumulativeYield` calculated at the `previousEpochTimestamp`. `previousEpochCumulativeYield` is also updated whenever the `_refreshCumulativeYield()` internal function is called.

`previousEpochCumulativeYield` is calculated as follows:

$$newPreviousEpochCumulativeYield = oldPreviousEpochCumulativeYield \* (1 + yield)^{timeElapsedToEpoch}$$

Here `timeElapsedToEpoch` refers to the time elapsed between the last `cumulativeYield` refresh and the `previousEpochTimestamp`.

Setting `yield` to `RAY` (1e27) - which is also its initial value at deployment - sets yield to zero. A positive yield will increase the `cumulativeYield` over time.<br>

**Epoch**

Although interest accrues each second, balances only increase each epoch. This is done to :

* Provide keepers with enough time to expire a bond (see Keepers)
* Avoid leftover residual dust amounts when transferring all of a user's balance, since most frontend wallets do not refresh a user's balance on a per second basis.
* Enable adapting epochs to bond term lengths if the DAO votes to do so. For example a 1 year T-Bill might have a 4 hour rebase while a 30 year bond could have a daily or weekly rebase.

Thus `balanceOf` and `totalSupply` both rely on the internal function `_calculatePreviousEpochCumulativeYield()`. The `_calculatePreviousEpochCumulativeYield()` is called in `_refreshCumulativeYield` to update the `_previousEpochCumulativeYield` state.

Even though only `_previousEpochCumulativeYield` is used to return external `KIBT` balances , the more accurate `cumulativeYield` state is required to track the yield earned between epochs.

Epochs add a layer of flexibility that enables `KIBTokens` to adapt to investment strategies with different time horizons.