Comments on: Compound Interest VS Interest Risk http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/ This is where your finance takes place Tue, 07 Oct 2008 09:34:32 +0000 http://wordpress.org/?v=abc By: The Financial Blogger | Canadians Are Not Comfortable In Regards To Their Personal Finance http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-3290 The Financial Blogger | Canadians Are Not Comfortable In Regards To Their Personal Finance Tue, 16 Sep 2008 10:01:42 +0000 http://www.thefinancialblogger.com/?p=62#comment-3290 [...] when they grow up. Frugal Dad shared one of his tricks to explain his 8 year-old girl the power of compounding interest. The most valuable heritage you could leave to your children is to show them how to handle [...] [...] when they grow up. Frugal Dad shared one of his tricks to explain his 8 year-old girl the power of compounding interest. The most valuable heritage you could leave to your children is to show them how to handle [...]

]]> By: The Financial Blogger | The Perfect Drug http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-3253 The Financial Blogger | The Perfect Drug Thu, 11 Sep 2008 10:01:38 +0000 http://www.thefinancialblogger.com/?p=62#comment-3253 [...] succeed without it and that it as an exponential power. Actually, passion is probably close to the power of compounding interest. To more it grow, the better it [...] [...] succeed without it and that it as an exponential power. Actually, passion is probably close to the power of compounding interest. To more it grow, the better it [...]

]]> By: The Financial Blogger | Tax Planning In 3D’s http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-2518 The Financial Blogger | Tax Planning In 3D’s Tue, 03 Jun 2008 10:01:00 +0000 http://www.thefinancialblogger.com/?p=62#comment-2518 [...] the tax experts If you are able to postpone any tax payment, you will become richer can richer as the power of interest compounding will work its magic on a bigger [...] [...] the tax experts If you are able to postpone any tax payment, you will become richer can richer as the power of interest compounding will work its magic on a bigger [...]

]]> By: The Financial Blogger | The Power of Systematic Investments http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-2348 The Financial Blogger | The Power of Systematic Investments Fri, 25 Apr 2008 10:01:34 +0000 http://www.thefinancialblogger.com/?p=62#comment-2348 [...] we combine the power of compounding interest with the power of systematic investment, we are absolutely sure to become millionaire one day. The [...] [...] we combine the power of compounding interest with the power of systematic investment, we are absolutely sure to become millionaire one day. The [...]

]]> By: Leverage and Interest Rate Risk http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-2294 Leverage and Interest Rate Risk Thu, 17 Apr 2008 02:13:25 +0000 http://www.thefinancialblogger.com/?p=62#comment-2294 [...] The Financial Blogger recently suggested that if you take out an investment loan, the compounding of the investments mitigate the risk of a rapid rise in interest rates: Let’s take a 100K investment loan at prime for example. With an expected return of 7.2%, your investment will double after 10 years. Therefore, you will still be paying $6,000 of interest but you will make $14,400 in investment income. Compounding interest make your investment grow over time while you will always pay the interest on 100K. [...] [...] The Financial Blogger recently suggested that if you take out an investment loan, the compounding of the investments mitigate the risk of a rapid rise in interest rates: Let’s take a 100K investment loan at prime for example. With an expected return of 7.2%, your investment will double after 10 years. Therefore, you will still be paying $6,000 of interest but you will make $14,400 in investment income. Compounding interest make your investment grow over time while you will always pay the interest on 100K. [...]

]]> By: The Financial Blogger | Last Day For RRSP Contribution http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-1937 The Financial Blogger | Last Day For RRSP Contribution Fri, 29 Feb 2008 11:27:22 +0000 http://www.thefinancialblogger.com/?p=62#comment-1937 [...] you will miss a real good opportunity to invest when the markets are down. In addition to that, the power of compounding interest will loose a year in order to work out its [...] [...] you will miss a real good opportunity to invest when the markets are down. In addition to that, the power of compounding interest will loose a year in order to work out its [...]

]]> By: The Financial Blogger | The Advantages of Contributing To Your RRSP With A Low Income http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-1906 The Financial Blogger | The Advantages of Contributing To Your RRSP With A Low Income Tue, 26 Feb 2008 11:00:36 +0000 http://www.thefinancialblogger.com/?p=62#comment-1906 [...] The power of compound interest [...] [...] The power of compound interest [...]

]]> By: Mikael http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-86 Mikael Thu, 31 May 2007 23:52:47 +0000 http://www.thefinancialblogger.com/?p=62#comment-86 Hi Mike, I can appreciate your point with your explanation. However, I classify this situation under the cash flow risk instead of interest risk. Leveraging strategies are definitely not for everybody as you need to make sure you have enough money to cover the monthly payment with any rate fluctuation. Cheers, FB. Hi Mike,
I can appreciate your point with your explanation. However, I classify this situation under the cash flow risk instead of interest risk. Leveraging strategies are definitely not for everybody as you need to make sure you have enough money to cover the monthly payment with any rate fluctuation.

Cheers,
FB.

]]> By: Mikael http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-85 Mikael Thu, 31 May 2007 23:50:56 +0000 http://www.thefinancialblogger.com/?p=62#comment-85 Hi CC, I don't know about apple and oranges as I usually don't go at the grocery store ;-) Seriously, I actually simplified the calculation to make my point without exhaustive spread sheets of numbers. As the investment is in nominal value, I also used the same for the interest paid. $6000 a year will definately not mean the same thing ten years from now. Same thing for the investment. This is the risk when doing such calculations as they are so many ways of seeing it. I could have also calculated the compound interest on the tax return supposing that many strategies are adding this money to the investment. Nonetheless, I think the calculation still shows that interest risk is a minor factor in the long run. I would be curious to see your modified calculation. It would be great to have a full second thought on this topic. Cheers, FB. Hi CC,
I don’t know about apple and oranges as I usually don’t go at the grocery store ;-)
Seriously, I actually simplified the calculation to make my point without exhaustive spread sheets of numbers. As the investment is in nominal value, I also used the same for the interest paid. $6000 a year will definately not mean the same thing ten years from now. Same thing for the investment.

This is the risk when doing such calculations as they are so many ways of seeing it. I could have also calculated the compound interest on the tax return supposing that many strategies are adding this money to the investment.

Nonetheless, I think the calculation still shows that interest risk is a minor factor in the long run.

I would be curious to see your modified calculation. It would be great to have a full second thought on this topic.

Cheers,

FB.

]]> By: FourPillars http://www.thefinancialblogger.com/compound-interest-vs-interest-risk/#comment-81 FourPillars Thu, 31 May 2007 13:55:58 +0000 http://www.thefinancialblogger.com/?p=62#comment-81 That's a pretty good post, Mikael. In fact you've outlined the reasons I am doing leveraged investments myself. I should clarify that my concern about interest rate risk with respect to debt has to do with cash flow. I'll give you an example (which looks suspiciously like my own situation). My example is a person who pays $1500/month in mortgage payments and is comfortable with that amount - they can live a normal life and even make extra payments on the mortgage. What if their payments were $1800/month? They can still live fairly normally although the extra payments will stop. What if their payments go to $2100? At this point, they have to start cutting things out of their normal activities in order to make ends meet. If payments go above $2400? They have to cut back to essentials and maybe have to get help from parents if payments go any higher. Ok - that's our example person. What if this person/couple wanted to buy a new car/ do a house reno/ borrow to invest? I'm suggesting they shouldn't just blindly assume they can always make the interest payments just because they can make them if the rates don't change. What this person has to do is figure out some scenarios where interest rates go up...and not 21% either, what if the prime rate goes to 8%?, 9%? and see the effect on their payments and their lifestyle in order to better determine if they want to add that risk. In the case of my sample person - they probably can handle some extra interest rate risk by locking in their mortgage for a period of time and making sure they pay it down. They also need to assess the floating portion and make sure they can handle increased payments if rates go up (even a little bit) and adjust the extra amount they borrow accordingly. Some people can handle borrowing $250k for investment purposes quite easily, some other people shouldn't borrow anything. My point is that you need to do proper analysis in order to determine how much you can safely borrow. Mike That’s a pretty good post, Mikael. In fact you’ve outlined the reasons I am doing leveraged investments myself.

I should clarify that my concern about interest rate risk with respect to debt has to do with cash flow.

I’ll give you an example (which looks suspiciously like my own situation).

My example is a person who pays $1500/month in mortgage payments and is comfortable with that amount - they can live a normal life and even make extra payments on the mortgage.

What if their payments were $1800/month? They can still live fairly normally although the extra payments will stop.

What if their payments go to $2100? At this point, they have to start cutting things out of their normal activities in order to make ends meet.

If payments go above $2400? They have to cut back to essentials and maybe have to get help from parents if payments go any higher.

Ok - that’s our example person.

What if this person/couple wanted to buy a new car/ do a house reno/ borrow to invest? I’m suggesting they shouldn’t just blindly assume they can always make the interest payments just because they can make them if the rates don’t change.

What this person has to do is figure out some scenarios where interest rates go up…and not 21% either, what if the prime rate goes to 8%?, 9%? and see the effect on their payments and their lifestyle in order to better determine if they want to add that risk.

In the case of my sample person - they probably can handle some extra interest rate risk by locking in their mortgage for a period of time and making sure they pay it down. They also need to assess the floating portion and make sure they can handle increased payments if rates go up (even a little bit) and adjust the extra amount they borrow accordingly.

Some people can handle borrowing $250k for investment purposes quite easily, some other people shouldn’t borrow anything. My point is that you need to do proper analysis in order to determine how much you can safely borrow.

Mike

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