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  • Added for You - Become Your Own Financial Adviser: Understand The Theory Of Money

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    d.

    Assuming your annual fuel bill is ?100, what is the effective rate of return?

    On the face of it, you might say 8%, because that i

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    The time value of money

    When lending (and borrowing) money, the timing of payments of interest and return of capital has a significant effect on the interest rate. For interest receipts it is called the AER (annual equivalent rate). In the case of interest payments, such as for a mortgage, it is called the APR (annual percentage rate) but is effectively the same thing.

    When VAT on fuel was introduced in 1994, many people paid in advance to save the 8% tax. Decisions like this should consider the effective rate of return on the investment for the period.

    Assuming your annual fuel bill is ?100, what is the effective rate of return?

    On the face of it, you might say 8%, because that i

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    ant effect on the interest rate. For interest receipts it is called the AER (annual equivalent rate). In the case of interest payments, such as for a mortgage, it is called the APR (annual percentage rate) but is effectively the same thing.

    When VAT on fuel was introduced in 1994, many people paid in advance to save the 8% tax. Decisions like this should consider the effective rate of return on the investment for the period.

    Assuming your annual fuel bill is ?100, what is the effective rate of return?

    On the face of it, you might say 8%, because that i

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    for a mortgage, it is called the APR (annual percentage rate) but is effectively the same thing.

    When VAT on fuel was introduced in 1994, many people paid in advance to save the 8% tax. Decisions like this should consider the effective rate of return on the investment for the period.

    Assuming your annual fuel bill is ?100, what is the effective rate of return?

    On the face of it, you might say 8%, because that i

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    many people paid in advance to save the 8% tax. Decisions like this should consider the effective rate of return on the investment for the period.

    Assuming your annual fuel bill is ?100, what is the effective rate of return?

    On the face of it, you might say 8%, because that i

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    d.

    Assuming your annual fuel bill is ?100, what is the effective rate of return?

    On the face of it, you might say 8%, because that is what you have saved.

    However, taking account of the time value of money, you need to allow for the fact that normally you pay monthly or quarterly. So, ignoring seasonal variations, you would have only paid 7 1/2 months in advance on average.

    Consequently the effective AER (annual equivalent rate) of 8% over 7 1/2 months is 13%.

    Bearing in mind that it was effectively after tax, this was easily the best investment in 1994.

    The effect of compound interest

    Compound interest arises where interest is left in an investment and itself th

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