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11.0: Introduction

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    38377
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    Payments show up everywhere. You make payments on retail purchases; bank loans require payments; you even make payments to yourself into your RRSP! Payments fall into a few categories subject to important characteristics. Let’s explore these categories with a few everyday examples.

    • Last week you completed the purchase of your $150,000 starter home and finished all of the paperwork on your mortgage with the bank. You snagged a great mortgage rate of 5% compounded semi-annually, locking it in for a five-year term with monthly payments of $872.41 (for the next 25 years) starting one month after you move in.
    • You excitedly cruise to the Honda dealership to pick up your new $22,475 Honda Civic Sport, on which you have a four year lease. Pulling out your iPhone (for which you pay $60 monthly), you ensure that you have enough funds in your chequing account to make the $2,000 down payment today along with the first of your $242.16 monthly lease payments at 2.9% compounded monthly.
    • Driving away in your Civic, you stop in at Sleep Country Canada and purchase a queen size mattress for your new bedroom. You recall a TV ad promoting an $895 Sealy mattress plus 12% taxes with no money down and 12 easy, interest-free monthly payments of $83.53. It will be nice to have a comfortable bed to sleep in! Did you notice some of the characteristics of these various types of payments?
    • The mattress was low priced and was paid off in a short, one-year time frame, while the house was high priced and required a long, 25-year time frame to extinguish the debt.
    • The lease on your new car required a payment up front before you could drive it home, while your mortgage and mattress had payments that would start later.
    • Your monthly iPhone payment recurs endlessly until you terminate the contract.

    These examples also illustrate how businesses participate in consumer payments. Companies must understand financing for their consumers for a variety of reasons:

    • Banks create mortgages for their clients so that consumers can make large purchases through affordable payments. These payment plans are structured to allow the bank to earn profits through the interest charged.
    • Car dealerships use similar payment plans that earn interest on the payments in addition to the profits built into the products themselves. It is like double-dipping!
    • Sleep Country Canada sells more mattresses by allowing consumers to spread their payments over the course of a year instead of requiring them to hand over one big lump sum, which many people may not be able to do.

    And do not forget that regular payments are needed in business-to-business deals too, including mortgages, leases, insurance, utilities, and even product acquisitions.

    This chapter explores the concept of making regular payments toward savings goals or debt extinguishment. First it introduces key payment concepts and reviews different types of payment plans. You will then calculate the future and present value of a stream of payments. You extend the application of the concepts further to solve for other variables such as the payment amount, the term, and the nominal interest rate. Chapter 12 discusses commonplace annuity applications such as planning your RRSP and buying a car.

    Contributors and Attributions


    11.0: Introduction is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

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