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Investment - Time Value of Money and Regular Payments
Many sorts of financial arrangements include recurring payments over time. For example, most consumer loans, including mortgages, entail regular recurring payments to pay off the loan. Each period, some of the payment covers the interest on the loan and the remainder of the payment pays off some of the principal (the lent amount). A pension savings scheme or pension plan may also require recurring contributions.
Most consumer loans culminate in an ultimate balance of money equal to zero. That is, the loan is paid off. A mortgage is an example of a financial instrument that requires the eventual balance of the loan to be zero.
A mortgage involves a loan and a series of fixed payments. The initial amount of the loan is referred to as the principle. Although the monthly amounts are fixed, the portion of each payment that is interest is based on the remaining principal at the beginning of each period. As portion of the principal is repaid each period, the amount of interest lowers over time, and so the amount of principal repaid grows with each subsequent payment until the value of the principal is reduced to zero. At this moment, the debt is considered to mature.
Time Value of Money and Purchasing Power: The Effect of Inflation
The temporal worth of money is strongly tied to the ideas of inflation and buying power. Inflation is the process by which prices of goods and services grow over time,
In short, a dollar today is worth more than a dollar to be received in the future because inflation erodes the value of money, and hence purchasing power.
Many sorts of financial arrangements include recurring payments over time. For example, most consumer loans, including mortgages, entail regular recurring payments to pay off the loan. Each period, some of the payment covers the interest on the loan and the remainder of the payment pays off some of the principal (the lent amount). A pension savings scheme or pension plan may also require recurring contributions.
Most consumer loans culminate in an ultimate balance of money equal to zero. That is, the loan is paid off. A mortgage is an example of a financial instrument that requires the eventual balance of the loan to be zero.
A mortgage involves a loan and a series of fixed payments. The initial amount of the loan is referred to as the principle. Although the monthly amounts are fixed, the portion of each payment that is interest is based on the remaining principal at the beginning of each period. As portion of the principal is repaid each period, the amount of interest lowers over time, and so the amount of principal repaid grows with each subsequent payment until the value of the principal is reduced to zero. At this moment, the debt is considered to mature.
Time Value of Money and Purchasing Power: The Effect of Inflation
The temporal worth of money is strongly tied to the ideas of inflation and buying power. Inflation is the process by which prices of goods and services grow over time,
In short, a dollar today is worth more than a dollar to be received in the future because inflation erodes the value of money, and hence purchasing power.
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