Concept of Interest as compensation for loss of purchasing power due to “inflation”


0

Concept of Interest as compensation for loss of purchasing power due to “inflation”

You keep money in a deposit with a bank. It could be a Savings Bank or a Fixed Deposit. What does the bank pay to you? “Interest”. This is the “return” on your investment. Why should the bank pay interest to you?  Let us enumerate the possible reasons for the bank’s action.

¨        The bank does the business of lending. For this, it requires funds through deposits. It earns interest on loans and pays interest on deposits;

¨        With the passage of time, the purchasing power of money reduces. The same thing will happen to your deposit with the bank. The bank gives compensation to you for this loss in value of money;

¨        In case the bank does not pay interest, it will not get funds for lending. You will not keep deposits with it. You will choose other willing banks or avenues of investment.

While all of them are correct, we are more interested in the second reason. Value of money erodes due to “inflation” as we have seen in the earlier paragraph. The rates of inflation would be different for different countries. Further, it could be different for the same country at different times. Sometimes it could be high while at some other times, it could be low.


Like it? Share with your friends!

0
BMS Team

We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected].

0 Comments


Warning: Undefined array key "html5" in /home/bmsnewco/public_html/wp-content/plugins/facebook-comments-plugin/class-frontend.php on line 140

Facebook comments:

This Website Is For Sale. Email us an offer we cannot refuse on [email protected] :)

X
Choose A Format
Personality quiz
Series of questions that intends to reveal something about the personality
Trivia quiz
Series of questions with right and wrong answers that intends to check knowledge
Poll
Voting to make decisions or determine opinions
Story
Formatted Text with Embeds and Visuals
List
The Classic Internet Listicles
Countdown
The Classic Internet Countdowns
Open List
Submit your own item and vote up for the best submission
Ranked List
Upvote or downvote to decide the best list item
Meme
Upload your own images to make custom memes
Video
Youtube and Vimeo Embeds
Audio
Soundcloud or Mixcloud Embeds
Image
Photo or GIF
Gif
GIF format