1. What is an interest rate?When you go to the bank and bank give someone a loan at a certain percentage then that interest rate reflects the expectations of inflations and reflects borrow risk2. higher interest? higher risk, higher inflation or both3. subprime borrowers pay higher interest Greece pays higher interest than Germany because they think they might default4. during 2008 financial crisis: subprime home loans-borrowers who weren’t credit worthy paid a higher interest rate and they defaultedB) Artists and interest rate1. Less risky established artist: 20% Artist Royalty and risky new artist: 15% Artist RoyaltyThat seems backward, the higher risk should pay a higher interest rate but it makes sense if you think about it2. From the record company perspective there is a “Implied interest rate”3. Formula: 100% - Artist Royalty Rate = Implied interest RateHigh Risk New Artist 100% - 10% = 90% implied interestLower Risk Established Artist100%-20% = 80% implied interestSo the riskier artists has a higher interest rateRules of risk and reward is seen here80% and 90% are both still high interest rate but that’s because the music industry is unpredictable4. example: the future value of $50,000 of 5% will accumulate to someone paying $52,053.28(this is mortgage calculation)a. as risk increases the price you pay is higherC) memorize1. V=future value2. PV=present value3. i=interest rate for the specified period4. n=number of time periods5. formula: FV=PV(1+i)^n6. Example: Calculate the future value of a sum of $1800. Interest rate is 7% a year. The time period is one year. (The interest rate is only calculated once.)FV = 1800*(1+.07)FV = 19267. Example: Calculate the future value of a sum of $4000. Interest rate is 4.5% a year. The time period is one year. (The interest rate is only calculated once.)FV = 4000*(1+.045)FV = 41808. The longer amount of time the loan it is the riskier it is and inflation should be taken into account9. The interest rate is expressed in years but it is sometimes compounded monthlyIt is the same formula but 1 year=12 monthsSo you adjust the interest rate, you have to divide the interest rate by 12 monthsD) Some statements1. FV increases when interest rates increase and FV decreases when interest decrease which implies that:FV increases when risk increases and FV decreases when risk decreasesE) “Black Swans” Outliers and unpredictable Smash Hits1) Songs are very unpredictable very risky very high rewards.2) “Time Value of Money” – risk of inflation and other factors and generally that creates “Risk and Reward”3) greater risk demand greater rewardMBUS 3000 1st Edition Lecture 12Outline of Current Lecture I. Interest rate II. Artists and interest rates III. MemorizationIV. Some statements V. Black Swans” Outliers and unpredictable Smash HitsCurrent LectureA) Interest rate These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. What is an interest rate? - When you go to the bank and bank give someone a loan at a certain percentage then that interest rate reflects the expectations of inflations and reflects borrow risk 2. higher interest? higher risk, higher inflation or both 3. subprime borrowers pay higher interest Greece pays higher interest than Germany because they think they might default4. during 2008 financial crisis: subprime home loans-borrowers who weren’t credit worthy paid a higher interest rate and they defaulted B) Artists and interest rate 1. Less risky established artist: 20% Artist Royalty and risky new artist: 15% Artist Royalty - That seems backward, the higher risk should pay a higher interest rate but it makes sense if you think about it 2. From the record company perspective there is a “Implied interest rate” 3. Formula: 100% - Artist Royalty Rate = Implied interest Rate - High Risk New Artist100% - 10% = 90% implied interest - Lower Risk Established Artist 100%-20% = 80% implied interest - So the riskier artists has a higher interest rate - Rules of risk and reward is seen here - 80% and 90% are both still high interest rate but that’s because the music industry is unpredictable4. example: the future value of $50,000 of 5% will accumulate to someone paying $52,053.28(this is mortgage calculation)a. as risk increases the price you pay is higher C) memorize 1. V=future value 2. PV=present value 3. i=interest rate for the specified period 4. n=number of time periods 5. formula: FV=PV(1+i)^n6. Example: Calculate the future value of a sum of $1800. Interest rate is 7% a year. The time period is one year. (The interest rate is only calculated once.) - FV = 1800*(1+.07)- FV = 1926 7. Example: Calculate the future value of a sum of $4000. Interest rate is 4.5% a year. The time period is one year. (The interest rate is only calculated once.) - FV = 4000*(1+.045) - FV = 4180 8. The longer amount of time the loan it is the riskier it is and inflation should be taken into account 9. The interest rate is expressed in years but it is sometimes compounded monthly- It is the same formula but 1 year=12 months - So you adjust the interest rate, you have to divide the interest rate by 12 months D) Some statements 1. FV increases when interest rates increase and FV decreases when interest decrease which implies that: - FV increases when risk increases and FV decreases when risk decreases E) “Black Swans” Outliers and unpredictable Smash Hits 1) Songs are very unpredictable very risky very high rewards. 2) “Time Value of Money” – risk of inflation and other factors and generally that creates“Risk and Reward” 3) greater risk demand greater