Shaneen Angelique P.

Morales

MBA-NT

BA 303: Advance Financial Management with Managerial Accounting and Control

(Saturday; 12-3PM)

Date Submitted: October 9, 2020

Learning Insights on “Interest Rates and Risk & Rates of Return”

According to the 1st speaker from our webinar last October 3, 2020, when we talk about
interest, it is seen differently based on whose point of view you are looking. If you are the
lender, interest means income because you earn from the loans that you lend to other people.
On the other hand, if you are the borrower, interest means cost because it determines how
much I will pay for a debt or loan. The speaker also discussed the factors that influence the cost
of money which are production opportunities, risk, time preferences for consumption and
inflation. She also cited the determinants of interest rate which are REAL risk-free rate of
interest, nominal interest rate, inflation premium, default risk premium, liquidity premium and
maturity risk premium. She talked about the yield curve. Based on my further readings, I learned
that it can also be used by investors to forecast interest rates. Also, there are two main factors
that determine the interest rates of bonds. One is how risky the bond is and the other one is how
long the duration of the bond. Lastly, she also discussed Pure Expectations Theory wherein
traders assume that long term bonds are not risky compared to short term bonds.

The 2nd topic is about risk and rates of return. They defined risk as the potential for
divergence between the actual outcome and what is expected. An important principle of
investment is that higher returns entail higher risk. Risk is categorized into systematic and
unsystematic. Systematic risk is the variability of return on stocks or portfolios associated with
changes in return on the market as a whole while unsystematic risk is the variability of return on
stocks or portfolios not explained by general market movements. Adding these two will result in
total risk. They also discussed return which is the income received on an investment plus any
change in market price or the money made or loss on an investment for some period of time.
Expected return is also mentioned which is the return that an investor expects to earn on an
asset, given the price, growth potential, etc.
References:
JP Morgance Chase & Co. (2020). Interest Rates: What borrowers pay and lenders earn.
Retrieved from https://www.chase.com/personal/investments/learning-and-
insights/article/napkins-finance-interest-rates
Corporate Finance Institute (n.d.). What is the Yield Curve?. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/yield-curve/