Date: 2014-09-25
Thought on the concept of loans and interest rates
I might appear silly to ask why the concept of interest rate exist. But, still, I am curious. After studying it for a while, I still don't feel comfortable with the idea that it must exist.
Borrowers pay back the lenders the face value of the loan plus the interest, which is almost always positive. The concept of present and future value helps explain and justify the positive interest. Historically, the rates indeed have been positive, and this could seem to make sense because the opportunity cost of the lender's capital (in the lender's perspective) should somehow be priced into the transaction. But what about the lender's opportunity of losing money? How come the concept of 'opportunity benefit' does not receive enough attention? Are people good in placing their bets, in general? Are the counterparts just too politically correct to be critical about the lenders' investment ability? Is it a representation of the bargaining power discrepancy? Are they all just very optimistic, being humans? How does deflation or stagflation affect the interest rate? Which one of the two, inflation and the interest rate, should/would be the egg and the chicken? Would this be an evidence of cash holders' okay performance despite the inflation?
Speaking of 'opportunity benefit,' Hyundai Motor Corporation (HMC)'s recent bet on Korea Electric Power Corporation's headquarter does not seem all that bad to me, in the cash/ asset management perspective. Of course, the decision making process of the bid is troubling in the corporate governance perspective, but we know very well what to expect, and so it's probably correct to think that enough discount attributable to its poor corporate governance has always existed on the HMC.