Explain whether you rather have a savings account that paid interest compounded on a Monthly basis or compounded on an annual basis?
Deposits in savings accounts earn interest based on periodic rates. These periods range from monthly to annual rates, each with different implications. The interest earned is based on a pre-determined rate and the subsequent interest also earns interest of its own, leading to its identification as a compound rate (The University of Hawaii, nd). The potential gains and losses that result from frequent compounding are subject to the volatility of certain macro-economic and micro-economic factors. The more volatile the market is, the more these gains and losses are recognized. On the other hand, the more extended compounding periods are, the more returns tend to converge towards market rates. Owing to this reason, I own a savings account that has an adjustable quarterly compounding rate. I considered that shorter timeframes would render my deposits more volatile to changing market rates. A longer period would prove detrimental if an opportunity to earn a return above the market rates rise, and no advantage is taken.
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Describe what an amortization schedule is and its uses. Explain the purpose of an amortization schedule .
The term amortization is applied to both assets and loans. It is the process of spreading payments over multiple periods (Kienitz and Caspers, 2017). Amortization could be partial where only part of the asset cost or loan repayment is made over the life of the asset or loan and the remaining principal at maturity. It could also be full amortization where each payment constitutes interest and part of the principal, and the ending book value is zero. An amortization schedule is a table that shows the periodic loan repayments, breaking down each principal and interest payment amount until the full loan is paid (Investopedia, 2019). It tracks each payment made over the lifetime of the loan and can be used to calculate the amount that is yet to be paid. It can also be used to track the movement of interest rates in the market and subsequently, the returns on the loans.
Interest on a home mortgage is more helpful in reducing taxes than the interest paid in later years
Initial mortgage repayments mostly constitute of the interest payment with the bulk of the principal being spread out as the loan matures. The more significant portion of these initial payments consists of interest until about the half-life of the loan during which the interest and principal payments are similar. Recent amendments have made it that only the principal payments for individual loans, mortgages included are taxable (Cruz, Valls., & Segura, 2018). The interest payments can be claimed as a tax-deductible expense, reducing the taxable income, and consequently, the taxes paid (Kuttner and Shim, 2016). In order to pay less interest in succeeding years, one can accelerate the principal repayments in the initial years. This will reduce the tax-deductible income over the life of the loan. The consideration can be made by restructuring the terms of repayment on the mortgage or paying more copious principal amounts periodically when circumstances allow it.
Explain the difference between an ordinary annuity and annuity due.
An annuity is a stream of constant cash flows occurring at regular intervals. There are two types of annuities: annuity due and an ordinary annuity. The difference arises in the timing of these payments. An ordinary annuity schedules its payments to be made or received at the end of each period while an annuity due schedules for payments at the beginning of the time. (Abor, 2016). The terms of payments are agreed upon before the annuity is effected and may continue for a fixed term or in perpetuity.
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