From the course: Financial Accounting Part 2

Unlock the full course today

Join today to access over 23,200 courses taught by industry experts.

Risk and interest rates

Risk and interest rates

From the course: Financial Accounting Part 2

Start my 1-month free trial Buy for my team

Risk and interest rates

“

- Here is the key point, people typically need to be paid to get them to accept risk. Why are you willing to accept a 0.1% return on your savings account at the bank? Because it's safe. You don't have to worry about whether you're going to get your money back, so you accept that low return. But if you invest in our friend's online retailing business, will you accept a return of 0.1%? No, certainly not. With the investment in our friend's business, there is a chance that you will make a lot of money but also a chance that you will lose everything. That's risk, variability, and potential future outcomes. When value in the cashflow is expected to come from a business, we use a higher interest rate to compute the present value of very risky future cashflows. Now, there are lots of ways to do the adjustment of interest rates for risk. I will give an illustration using some numbers, but please realize that these numbers…

Contents