5 Ocak 2013 Cumartesi

Interest Based Investment / Borrowing Tools

Interest is a deterministic factor in the current global economy. Many investment or borrowing tools are working with the interest rate principles. Main tools, working with interest are shown below:
·   Bonds
·   Maturity accounts
·   Repo contracts
·   Loans
Above mentioned tools will be explained in further detail.

Bonds
In a contemporary economy, there are three kinds of treasury securities. These are treasury bills (mature in one year or less), treasury notes (mature in one to ten years) and treasury bonds (mature in ten years or longer).[1] Nevertheless, in Turkish economy these securities are divided into two categories regarding the scale of maturity greater than 1 year (called bonds) or shorter than 1 year (called bills).[2]

The price of the bond is determined regarding the following formula. It is about the sum of all discounted coupon payments (periodic interest payments to the investors[3]) and the discounted future value of the bond. Future value is also known as the maturity value of the bond and it is the last payment to the investor.[4]

Maturity Accounts
Bank customer invests into these accounts with a promise of not withdrawing in a pre-agreed period. These accounts can be classified regarding their maturity. These are 1 month, 3 month, 6 month and 12 month accounts.[5] These accounts are the cost creating accounts of the banks. Every bank tries to decrease the portion of these accounts in order to decrease the source cost. This is because they are working on interest basis. On the other hand, the savers prefer to invest their savings into most profitable accounts. Nevertheless, more gain creates more risk.

Interest gain from the deposits can be calculated with the following formula.

i=Interest rate in percentage and in daily basis
t=Total tenor in days
PV=Present value

i=Interest rate in percentage and in daily basis
t=Total tenor in days
PV=Present value

Repo Contracts
Repurchase agreements are financial instruments used in the money markets. A (the cash borrower) goes to B (the cash lender); with the promise made by A to B of repurchasing those securities later after taking the interest gain.[6] Repo income is calculated in compounded interest rate basis.

Loans
A loan is a type of debt. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.[7] Loans can be divided into two categories:
·   Personal finance
·   Corporate finance
Personal finance is used to provide the required finance for obtaining:
·   Personal vehicle
·   Personal real estate
·   Consumer durable goods or
·   Service (travel, education etc.)
Interest rate takes part in personal finance according to the below formula. The below shown interest rate is the rate in which all taxes are included.

[1] Wikipedia, “Treasury Securities,”
< http://en.wikipedia.org/wiki/Treasury_bond#Treasury_bond>
[2] TSPAKB, “Tahvil ve Bono Piyasaları,”
< http://www.tspakb.org.tr/index_tur.htm>
[3] Richard A.Brealey, İşletme Finansının Temelleri, (İstanbul:Literatür, 1997), 84.
[4] Brealey, 84.
[5] TBB, “Türk Lirası Mevduat ve DTH,”
<http://www.tbb.org.tr/turkce/temel_bankacilik/T%C3%BCrk%20Liras%C4%B1%20Mevduat%20ve%20D%C3%B6viz%20Tevdiat%20Hesaplar%C4%B1.doc>
[6] Wikipedia, “Repurchase Agreement,”
< http://en.wikipedia.org/wiki/Repo>
[7] Wikipedia, “Loan,”
< http://en.wikipedia.org/wiki/Loan>

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