how inflation affects principal
inflation effectively decreases the purchasing power of money over time the real value of the principal amount you borrowed may decline if you re repaying it over an extended period suppose you borrowed 10 000 as a personal loan with a 10 year term the value of that 10 000 would only be equivalent to about 10 000 1 0 03 10 or 7 441 58 at the end of the loan term if the annual inflation rate is 3 you re repaying the same nominal amount but the real value has declined due to inflation inflation and interest rates both interact with the principal amount of a loan but their combined effect can be quite different from the result of just calculating one of these alone you re paying more in nominal terms due to interest but the real burden of your debt could be less severe when you factor in inflation here s how let s revisit the example of borrowing 10 000 for 10 years with a 3 annual inflation rate now note that the loan was taken out with 5 simple interest assume both rates remain constant over the term of the loan principal in investingprincipal is also the original amount of money you ve invested separate from any earnings or interest accrued assume you deposit 5 000 in a high interest savings account bond or cd your account balance would have grown to 7 765 00 at the end of 10 years if the interest rate was 4 5 the 5 000 you initially deposited is your principal the remaining 2 765 00 is attributed to earnings principal in bondsthe principal of a bond or other fixed income investment is the amount the issuer agrees to pay back to the investor upon the bond s maturity a bond s principal is also known as its par value or face amount because this amount was printed on the face of the bond itself back when bonds were issued on actual pieces of paper 1the bond s principal excludes any coupon recurring interest payments or accrued interest although the issuer is obligated to pay these as well a 10 year bond with a 10 000 face value may be issued and have 50 recurring coupon payments semiannually the principal is 10 000 independent of the 1 000 worth of coupon payments over the bond s life a bond s principal isn t necessarily the same as its market price except when it s first issued a bond may be purchased for more or less than its principal depending on the state of the bond market principal in ownershipthe owner of a private company partnership or other firm type is also referred to as a principal this isn t necessarily the same as a ceo a principal might be an officer a shareholder a board member or even a key sales employee a company may also have several principals with the same equity stake in the firm anyone considering investing in a private venture will want to know who its principals are so they can assess the business s creditworthiness and potential for growth principals as responsible partiesthe term principal also refers to the party who can transact on behalf of an organization or account and who takes on the attendant risk a principal can be an individual a corporation a partnership a government agency or a nonprofit organization in this case principals may elect to appoint agents to operate on their behalf a principal could be involved in transactions ranging from a corporate acquisition to a mortgage the principals are usually listed in the transaction s legal documents they include everyone who signed the agreement and who therefore has rights duties and obligations for the transaction an individual who hires a financial advisor is considered to be a principal the advisor is the agent the agent follows the instructions given by the principal and may act on their behalf under specified conditions and terms the advisor is often bound by fiduciary duty to act in the principal s best interests the principal is at risk for any action or inaction on the agent s part 2 the principal takes the loss if the agent makes a bad investment a problem with the principal agent relationship can arise when there s a conflict in priorities between a person or group and the representative authorized to act on their behalf an agent may act contrary to the principal s best interests this can occur in many situations from the relationship between a client and a lawyer to the relationship between stockholders and a ceo 