The Rant: SUNNY SIDE OF THE STREET: ANALYSIS OF THE FINANCIAL SYSTEM AND THE ECONOMY (part 12)

Mission Statement

Wednesday, July 19, 2017

SUNNY SIDE OF THE STREET: ANALYSIS OF THE FINANCIAL SYSTEM AND THE ECONOMY (part 12)

INTEREST RATES AND BOND PRICES

Charles Lamson

Change must be measured from a known baseline.

---Evan Schwiit

The Present Versus the Future

State University currently charges students $5,000 a year for tuition. Following the appointment of an innovative financial officer. it offers enrolling freshmen a new way to pay four years tuition---pay $18,000 today, rather than $5,000 per year for four years. Would you participate in the plan? Following her third box office smash, a Hollywood sensation has just signed a multipicture contract. As Compensation, the star has been offered either $6 million today or $7.5 in five years. You are her financial adviser; what should she do and why? You win a million-dollar lottery and learn that the million dollars will be paid out in equal installments of $50,000 per year, over the next 20 years. Would you be willing to trade this stream of future income for one payment today? How large would that payment have to be?

The Time Value of Money

The interest rate is the cost to borrowers of obtaining credit, and the reward to lending for surplus funds. Thus, just as rent is the cost to apartment dwellers and the return to the landlord, the interest rate is the rental rate paid by borrowers and received by lenders when money is "rented out."

The central point to remember from this discussion, is the role the interest rate plays in linking the present with the future. Lending in the present enables spending in the future the sum of what is lent, plus the interest earned. Borrowing in the present enables spending in the present, but requires paying back in the future, what I borrowed plus interest. Since the interest rate is the return on lending, and the cost, of borrowing; it plays a pivotal role in spending, saving, borrowing, and lending decisions made in the present and bearing on the future. The concept I have been describing is called time value of money. Simply put, the interest rate represents the time value of money, because it specifies the terms upon which one can trade off. present purchasing power for future purchasing power. This is one of the most important and fundamental concepts in economics and finance.

Compounding and Discounting

Compounding: Futures

Compounding is a method used to answer a simple question: What is the future value of money lent or borrowed today? As is illustrated in Exhibit 1. the question is forward looking; we stand in the present today, and ask a question about the future.

1. Compounding: The Future Value of Money Lent Today

Click to enlarge.

Suppose Joseph A. Student agrees to lend a friend $1,000 for one year, the friend gives Joe an IOU for $1,000 and agrees to repay the $1,000 interest in a year. The amount that is originally lent is the principal---in this case $1,000. If the agreed interest rate is 6 percent, then the friend will pay total of $1,060 ($1,00 + $60).

Imagine now that Joe's friend borrows for two years instead of one year and makes no payments to Joe until two years pass. Here, is where compounding comes into play. Literally, compounding means to combine, add to, or increase. In the financial world, it refers to the increase in the value of funds that results from earning interest on interest. More specifically, interest earned after the first year is added to the original principal; the second year's interest calculation is based on this total. The funds to be received at the end of two years.

Discounting: Present Values

Compounding is forward looking. It addresses the question: What is the future value of money lent (or borrowed) today? As we shall see, understanding compounding is of money (lent) or borrowed (or borrowed) today? As we shall see understanding compounding is the key to really understanding what often seems to be a more difficult concept to grasp---discounting.

In effect, as shown in Exhibit 2, discounting is backward looking. It addresses this question: What is the present value of money to be received (or paid) in the future?

2. Discounting the Present Value of Money to Be Received in the Future

Recap

Compounding is finding the future value of a present sum. Discounting is finding the present value of a future sum.

*SOURCE: THE FINANCIAL SYSTEM AND THE ECONOMY, 3RD ED., 2003, MAUREEN BURTON & RAY LOMBRA, PGS. 130-133*

END

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The kingdom of God is among you

Luke 17:20-25 Asked by the Pharisees when the kingdom of God was to come, Jesus gave them this answer, ‘The coming of the kingdom of God does not admit of observation and there will be no one to say, “Look here! Look there!” For, you must know, the kingdom of God is among you.’ He said to the disciples, ‘A time will come when you will long to see one of the days of the Son of Man and will not see it. They will say to you, “Look there!” or, “Look here!” Make no move; do not set off in pursuit; for as the lightning flashing from one part of heaven lights up the other, so will be the Son of Man when his day comes. But first he must suffer grievously and be rejected by this generation.’

Live Adoration from Tyburn Convent

Adoration, also known as Eucharistic Adoration, is a Catholic prayer in front of the Blessed Sacrament. It is a sign of devotion and worship to Jesus Christ, who is believed to be present in the consecrated host. During adoration, Catholics pray to Jesus Christ before the Eucharist at their local parish. The Eucharist is typically kept in a tabernacle at the parish church, and may be presented in front of a closed tabernacle or in front of the exposed host in a monstrance. A monstrance is a vessel used in Roman Catholic, Anglican, High Church Lutheran, and Old Catholic churches. It is a stand made of precious metal that holds the Blessed Sacrament during adoration. The word "monstrance" comes from Latin and means "to show".

Love

1 Corinthians 13:4-7: Love is always patient and kind; it is never jealous; love is never boastful or conceited; it is never rude or selfish; it does not take offence, and is not resentful. Love takes no pleasure in other people’s sins but delights in the truth; it is always ready to excuse, to trust, to hope, and to endure whatever comes. 1 Corinthians 13:8-9,13: Love does not come to an end. But if there are gifts of prophecy, the time will come when they must fail; or the gift of languages, it will not continue for ever; and knowledge – for this, too, the time will come when it must fail. For our knowledge is imperfect and our prophesying is imperfect. In short, there are three things that last: faith, hope and love; and the greatest of these is love. Colossians 3:14-15: Over all these clothes, to keep them together and complete them, put on love. And may the peace of Christ reign in your hearts, because it is for this that you were called together as parts of one body. Always be thankful.

It is not peace I have come to bring, but a sword

Jesus instructed the Twelve as follows: ‘Do not suppose that I have come to bring peace to the earth: it is not peace I have come to bring, but a sword. For I have come to set a man against his father, a daughter against her mother, a daughter-in-law against her mother-in-law. A man’s enemies will be those of his own household. ‘Anyone who prefers father or mother to me is not worthy of me. Anyone who prefers son or daughter to me is not worthy of me. Anyone who does not take his cross and follow in my footsteps is not worthy of me. Anyone who finds his life will lose it; anyone who loses his life for my sake will find it. ‘Anyone who welcomes you welcomes me; and those who welcome me welcome the one who sent me. ‘Anyone who welcomes a prophet will have a prophet’s reward; and anyone who welcomes a holy man will have a holy man’s reward. ‘If anyone gives so much as a cup of cold water to one of these little ones because he is a disciple, then I tell you solemnly, he will most certainly not lose his reward.’ When Jesus had finished instructing his twelve disciples he moved on from there to teach and preach in their towns.

The beheading of John the Baptist

Matthew 14:1-12 Herod the tetrarch heard about the reputation of Jesus, and said to his court, ‘This is John the Baptist himself; he has risen from the dead, and that is why miraculous powers are at work in him.’ Now it was Herod who had arrested John, chained him up and put him in prison because of Herodias, his brother Philip’s wife. For John had told him, ‘It is against the Law for you to have her.’ He had wanted to kill him but was afraid of the people, who regarded John as a prophet. Then, during the celebrations for Herod’s birthday, the daughter of Herodias danced before the company, and so delighted Herod that he promised on oath to give her anything she asked. Prompted by her mother she said, ‘Give me John the Baptist’s head, here, on a dish.’ The king was distressed but, thinking of the oaths he had sworn and of his guests, he ordered it to be given her, and sent and had John beheaded in the prison. The head was brought in on a dish and given to the girl, who took it to her mother. John’s disciples came and took the body and buried it; then they went off to tell Jesus.

Psalms 9:16

The LORD is known by the judgment which he executeth: the wicked is snared in the work of his own hands. Higgaion. Selah - Question: What does Higgaion and Selah mean? Answer: Both Higgaion and Selah are used numerous times in the Old Testament. They occur together in Psalm 9:16. The meanings of these words are uncertain. We observe Higgaion in such passages as Psalm 9:16; 19:14; 42:3; Lamentations 3:63. In Arabic, the root gives a deep vibrating sound, like the murmering sound of a harp (Psa. 92:3). The International Standard Bible Encyclopedia states that it may be derived from the Greek versions of Psalm 9:16 and takes it to mean an instrumental interlude. It may also mean a soliloquy or meditation such as concerning the judgment of God (Psa. 9:16), the words and work of God (Psa. 19:14), and the loving kindness and faithfulness of God (Psa. 92:2-3). In the Septuagint, Selah is translated as daplasma (meaning a division). It occurs in Habakkuk 3:3, 9, 13 and 71 times in the Psalms. It is used in 39 of our 150 psalms. Of those 39 psalms, 31 they are ones handed over to "the chief Musician." So, pause and meditation may be the predominate idea. In addition, it may mean to lift up (Hebrew, salal) or, in some definitions, a repetition, end of a strophe, or a recurring symphony. In his sermon named "HIGGAION!" about Psalm 9:16, Archibald G. Brown, on August 17, 1873, at the East London Tabernacle said this: "When the psalmist wrote this verse, and reached the words 'The wicked shall be snared in the work of his own hands', he seemed to be overpowered at the terror of the thought, and so put a full stop and wrote in the word 'Higgaion!' As much as to say, 'O my soul, meditate on the tremendous truth my hand has penned, and let all who read the same meditate.' And then after 'Higgaion' he puts 'Selah'. He would have there to be a solemn pause. Oh, I would that there could be just one moment's solemn pause in our meeting tonight. Would that there could be a Selah, a Higgaion! Friends, shall there be? I put it to you. 'The Lord is known by the judgment which he executes; and the wicked shall be snared in the work of his own hands!" Now let us just for a moment meditate on that. Let there be a solemn Higgaion, and let every heart ask itself the question, 'How do I stand in reference to this tremendous truth?' *Answer by Dr. Joseph R. Nally, Jr. (https://thirdmill.org/answers/answer.asp/file/47892)*

The Rant

Mission Statement

Wednesday, July 19, 2017

SUNNY SIDE OF THE STREET: ANALYSIS OF THE FINANCIAL SYSTEM AND THE ECONOMY (part 12)

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