As per the heading ,the concept of 'interest' can be explained under two different aspects:
The first aspect can be considered favourable as it will represent 'interest' as a Reward.
The second aspect can be considered unfavourable as it will represent 'interest' as a compulsory obligation*
*Compulsory obligation represents a liability.
The concept of interest plays its role when the money is used as Medium of loan or a grant.
Here two parties are involved -Lender,who gives his money as a loan and receiver who acquires the money.
Interest represents the percentage of principal amount of money taken as loan.
In today's business environment there is nothing free of cost i.e there is always a consideration for a benefit.
Here it must be noted that a lender or receiver may be an institution also.
Let's understand this concept with an illustration:
You as a business owner (receiver) took a loan of INR 2500000 from a financial institution (lender) at 1% rate of interest per month.
Therefore, according to it monthly interest will be INR 25000(2500000*1/100)
Here it must be noted that interest amount does not include any part of principle amount i.e the amount of borrowing (or loan)will be the same.
But with the mutual concent of both the parties there may be a provision under which interest may include some part of principle amount so that the burden of loan get reduced to some extent.For example interest amount may be INR 30000(25000+5000) so next interest will be calculated on INR 2495000(2500000-5000).
Here INR 5000 is part of principle amount.
There is one more point that we should consider is that in case of arrears (i.e non payment of interest)
the interest will be calculated on loan amount + interest due.
If in above mentioned illustration there is non payment of interest for one month then on next month interest will be calculated as:
1% of 2525000(2500000+25000)=INR 25250
In this illustration 'interest' is considered as an obligation from your side.
Now let's understand it as a reward:
For example you as an investor invested your money on various marketable securities like bonds.
Here you are giving your idle money which can be utilised for other purposes.
Suppose you invested INR 50000 on fixed income securities like 10% government bonds
Therefore interest=INR 5000
Hence interest becomes a reward for you.
The first aspect can be considered favourable as it will represent 'interest' as a Reward.
The second aspect can be considered unfavourable as it will represent 'interest' as a compulsory obligation*
*Compulsory obligation represents a liability.
The concept of interest plays its role when the money is used as Medium of loan or a grant.
Here two parties are involved -Lender,who gives his money as a loan and receiver who acquires the money.
Interest represents the percentage of principal amount of money taken as loan.
In today's business environment there is nothing free of cost i.e there is always a consideration for a benefit.
Here it must be noted that a lender or receiver may be an institution also.
Let's understand this concept with an illustration:
You as a business owner (receiver) took a loan of INR 2500000 from a financial institution (lender) at 1% rate of interest per month.
Therefore, according to it monthly interest will be INR 25000(2500000*1/100)
Here it must be noted that interest amount does not include any part of principle amount i.e the amount of borrowing (or loan)will be the same.
But with the mutual concent of both the parties there may be a provision under which interest may include some part of principle amount so that the burden of loan get reduced to some extent.For example interest amount may be INR 30000(25000+5000) so next interest will be calculated on INR 2495000(2500000-5000).
Here INR 5000 is part of principle amount.
There is one more point that we should consider is that in case of arrears (i.e non payment of interest)
the interest will be calculated on loan amount + interest due.
If in above mentioned illustration there is non payment of interest for one month then on next month interest will be calculated as:
1% of 2525000(2500000+25000)=INR 25250
In this illustration 'interest' is considered as an obligation from your side.
Now let's understand it as a reward:
For example you as an investor invested your money on various marketable securities like bonds.
Here you are giving your idle money which can be utilised for other purposes.
Suppose you invested INR 50000 on fixed income securities like 10% government bonds
Therefore interest=INR 5000
Hence interest becomes a reward for you.
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