Interest Rates Essays - Mathematical Finance, Financial Markets

Interest rate essay Causes of interest rates can be explained as -deferred consumption. When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate. Inflationary expectations. Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this. Alternative investments. The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds. Risks of investment. There is always a risk that the borrower will default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail. Liquidity preference. People prefer to have their resources ava ilable in a form that can immediately be exchanged, rather than a form that takes time or money to realize. Taxes. Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss. The nominal interest rate is the amount, in money terms, of interest payable. The real interest rate, which measures the purchasing power of interest receipts, is calculated by adjusting the nominal rate charged to take inflation into account. There is a market for investments which ultimately includes the money market, bond market, and stock market and currency market as well as retail financial institutions. The CAPM returns the asset-appropriate required return or discount rate - i.e. the rate at which future cash flows produced by the asset should be discounted given that asset's relative riskiness. Betas exceeding one signify more than average "riskiness"; betas below one indicate lower than average. Thus a more risky stock will have a higher beta and will be discounted at a higher rate; less sensitive stocks will have lower betas and be discounted at a lower rate. The CAPM is consistent with intuition - investors (should) require a higher return for holding a more risky asset. Since beta reflects asset-specific sensitivity to non-diversifiable, i.e. market risk, the market as a whole, by definition, has a beta of one. Stock market indices are frequently used as local proxies for the market - and in that case (by definition) have a beta of one. An investor in a large, diversified portfolio (such as a mutual fund) therefore expects performance in line with the market. The risk of a portfolio is comprised of systematic risk and specific risk. Systematic risk refers to the risk common to all securities - i.e. market risk. Specific risk is the risk associated with individual assets. Specific risk can be diversified away (specific risks "average out"); systematic risk (within one market) cannot. Depending on the market, a portfolio of approximately 15 (or more) well selected shares might be sufficiently diversified to leave the portfolio exposed to systematic risk only. A rational investor should not take on any diversifiable risk, as only non-diversifiable risks are rewarded. Therefore, the required return on an asset, that is, the return that compensates for risk taken, must be linked to its riskiness in a portfolio context - i.e. its contribution to overall portfolio riskiness - as opposed to its "stand alone riskiness." In the CAPM context, portfolio risk is represented by higher variance i.e. less predictability. Exactly how these markets function is a complex question. However, economists generally agree that the interest rates yielded by any investment take into account: ?The risk-free cost of capital ?Inflationary expectations ?The level of risk in the investment ?The costs of the transaction The risk-free cost of capital is the real interest on a risk-free loan. While no loan is ever entirely risk-free, bills issued by major nations like the United States are generally regarded as risk-free benchmarks. This rate incorporates the deferred consumption and alternative investments elements of interest. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected

Successful Selling at Christmas Craft Fairs

Successful Selling at Christmas Craft Fairs Three years ago, I accepted an invitation to sell my novels at a local gym’s mini Christmas craft fair. I wound up selling 21 copies. The experience was so positive that the following Christmas I expanded to high school fairs and sold 51 copies. This year, I sold over 80 books at more venues, all within five miles of home. Needless to say, Christmas craft fairs can be a lucrative way to sell books. To do so successfully, it’s a good idea to first visit local craft fairs at high schools, community centers, and churches. Talk to vendors and show organizers a copy of your book. Ask about registration requirements and ask to be put on a mailing list. Begin with smaller venues that charge a minimal fee. Large community center events draw larger crowds, but their fees can be $350 or more. Most craft fairs have an adjudication process and prefer only handmade goods. For this reason, even self-published books can be a gray area for judges and organizers. Although I not only wrote, but typeset my first mystery series, the professionally designed cover disqualified me at some fairs, but not at others. A third of this year’s fairs accepted my traditionally published series as well. If you’re upfront with organizers, some of them will make an exception, especially if you’ve tried both publishing options with a single series. Competition for table space at established venues can be fierce, so apply long before the deadline. If you’re accepted at several fairs, be mindful of the dates. Most fairs occur on weekends in November and early December, (fees and application forms might be required months earlier). You won’t want to double-book an event, as organizers require you to be there in person. A few days before the fair, you’ll receive rules and helpful information. High schools are especially great venues as students are on hand to help carry your stock and will watch over your table if you need a break. Once you’ve set up your table (make it festive) employ the same strategies you’d use at a book signing: stand as much as possible, smile and engage people, offer to sign copies, and bring water. You’ll also need a float, receipt book, food, (events are five to seven hours long) and bags for customers. The great thing about Christmas craft fairs is that attendees are looking for something to buy and they bring cash. Visa/debit machines are a good idea for large venues, but not worth the bank’s fee at smaller fairs. If you have more than one book in a series, sign and wrap the books in clear cellophane, add a bow and ribbon, and sell them as signed gift sets. Generally, tables are large enough to show promotional materials and an info sheet featuring review excerpts and availability elsewhere. Business cards are a must! I handed out cards to several book club members and teachers looking for guest speakers. Customers also wanted to know if my books were available on Kindle, and preferred a card to a bookmark. Christmas craft fairs are often unpredictable. Books will sell well at some venues but not at others. The following year, the reverse will be true. Keep records to analyze which fairs work best for you. If your books are set locally or have some other local slant, emphasize this, as people love to read about their own area. Above all, have fun.