Banking theories in the United States before 1860

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Monograph

Identifikator:: 1755492553

URN:: urn:nbn:de:zbw-retromon-133529

Document type:: Monograph

Author:: Miller, Harry Edward http://d-nb.info/gnd/1055250875

Title:: Banking theories in the United States before 1860

Place of publication:: Cambridge

Publisher:: Harvard University Press

Year of publication:: 1927

Scope:: XI, 240 S.

Digitisation:: 2021

Collection:: Economics Books

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Document type:: Monograph

Structure type:: Chapter

Title:: Part II. The utility of banks as agencies in the distribution of loanable funds

Collection:: Economics Books

Sec. 8] THE RISK ELEMENT 279 ordinarily be less than this “mathematical value” of $97. We may suppose it to be $92.50, indicating a coefficient, of caution of 22. Here, as in the case of the lottery ticket, we have regarded the actual value of the bond as obtained from its riskless value by applying first the probability factor, and second the caution factor, %*. If the probabilities of receiving the individual interest payments were not regarded as independent, the calcula- tions of the mathematical value would differ somewhat from the preceding. Thus, if we suppose that default in one interest payment carried with it, by the terms of the contract, the default in all subsequent interest payments, we should have to apply the theory of probability some- what differently! but the principle would be the same. §8 There is another way, and one which conforms more to ordinary usage, in which the commercial value of the bond may be derived from the riskless value. While the price of the bond will vary inversely with the risk, the rate of interest varies directly with the risk; so that as the value of the bond descends, the corresponding rate of interest will ascend. Thus we have riskless, mathematical, and commercial rates of interest — 4 per cent, 5.4 per cent, and 6 per cent — corresponding respectively with the riskless, mathematical, and commercial values of the bond — $108, 397, $92.50. The question sometimes arises, where the element of risk thus raises the basis on which the bond is sold, whether the 6 per cent is a true “rate of interest.” The ques- tion is purely one of definition. Were it possible, it would be simpler to confine the application of the phrase rate of interest” to an exchange between present and future risk- less income. But in this case, it is always exceedingly diffi- ! For the consideration of this case, see Appendix to Chap. XVI, § 2.

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