Free Trial

Safari Books Online is a digital library providing on-demand subscription access to thousands of learning resources.


  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

6. Reminiscences of a Convertible Operat... > The Best Calculator Is in Your Head

The Best Calculator Is in Your Head

If you like to approximate—and I think the ability to approximate is critical, especially for students getting started in finance and business—you can see that the order of magnitude makes sense. If you’re buying something at 80 and getting 100 for it in ten years, that means you’re making a 25% return over the period. A straight-line approximation would be 2.5% a year. But this ignores two things—first of all, you’re paying 82, not 80, so the return is going to be somewhat less than 2.5%. Also, the straight-line approximation ignores the effect of compounding, which adds up over longer periods even at low interest rates.

OK, so you’ve bought this ten-year quasi-bill for 82, yielding 2%. Now let’s say rates for this kind of paper spike to 3%. When we were looking at one-year bills, the rate move meant a loss of about one point, 1%. What about on the ten-year?


  

You are currently reading a PREVIEW of this book.

                                                                                                                    

Get instant access to over $1 million worth of books and videos.

  

Start a Free 10-Day Trial


  
  • Safari Books Online
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint