Yes It Is True

Topics: Investment, Arithmetic mean, Rate of return Pages: 4 (1425 words) Published: March 17, 2013
For most of your life, you will be earning and spending money and it’s rare that the current money income exactly balance with your consumption desires. Most of the time we feel shortage and may be some times we can afford to spend, to avoid this one have to borrow or save to get benefit in the future. When spending is more than the income usually people tends towards saving. Though there are many ways to save but hiding it is not enough as its not worth full and remain same but if you want to enjoy it more than today then you have to invest it somewhere and get the profit in long run. Where as some people don’t meet their ends so that they need to borrow from different sources and pay back in future. The rate of exchange between future consumption (future dollars) and current consumption (current dollars) is the pure rate of interest. It is the exchange rate between future consumption (future dollars) and present consumption (current dollars). Market forces determine this rate. The fact that people are willing to pay more for the money borrowed and lenders desire to receive a surplus on their savings (money invested) gives rise to the value of time referred to as the pure time value of money. If there is devaluation of money in future then the investor demand higher interest rate to cover inflation effect. If the future payment from the investment is not certain, the investor will demand an interest rate that exceeds the pure time value of money plus the inflation rate to provide a risk premium to cover the investment risk Pure Time Value of Money. Investment is the current commitment of dollars for a period of time in order to derive future payments that will compensate the investor for (1) the time the funds are committed, (2) the expected rate of inflation, and (3) the uncertainty of the future payments. There are certain ways and means to invest and the investor who is giving away all his savings should properly check that weather his savings are in...
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