Mba 503

Mba 503

  • Submitted By: SUGARMAN
  • Date Submitted: 02/15/2009 2:47 PM
  • Category: Business
  • Words: 601
  • Page: 3
  • Views: 310

loan and this can be taken into account in the cash flow calculations for an individual. Using TVM he can calculate the interest payments and the principal payments for each year. For business, it can decide if it should rent or buy the office space. It can also calculate interest payments etc which should be accounted in financial statements. Retirement savings Since a dollar today is worth only a fraction several years later it is important to know about TVM in planning retirement savings. Using TVM one can calculate the money required per month to lead a given standard of living after retirement. Since there will be no income earned after retirement the money required for living must come from savings. This will help in determining the amount of monthly investment that must be made today towards retirement savings. Interest rate components Interest rate is an important variable of time value of money. Interest rate is the price that the lender charges for lending his money to borrowers. There are many components of interest rate and each one reflects a form of compensation for the lender. The components are real interest, inflation and risk. Real interest This is the interest charged for compensating the lender for spending his money during the term of the loan. It is known today that real interest rate changes and the change is substantial. This rate is linked to the demand for capital and increases if the demand for capital increases and drops when the demand drops. Inflation The inflation component of the interest rate is the compensation that the lender requires to protect him against inflation. Every lender predicts a rate of inflation and there is a risk associated with that prediction. The inflation component of the interest rate takes care of inflation and also the risk associated with the prediction. There is always a possibility that the inflation could increase over the loan period. This component is there to protect the lender against...

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