Boris Boyka wrote:Gordon Gekko wrote:My minimum opportunity cost is the CBK risk free rate - which the Chase Bank bond has just upped to 13%.
Repayment will have a long payback period with inconsistent repayment. Plan also suggests that I'll be responsible for rent collection. I'll add another 15%. If I can get 28% l can consider. And with the shilling misbehaving, this rate must be variable.
comprehending this seems like trying understand Russian!
Corporate Accounting 101.
When making a decision to invest, one must weigh against different opportunities. Different opportunities have different risks, one must expect a higher return on a riskier project.
So what is the minimum risk one can accept? It is generally accepted that Government bonds are the least risky instruments in the world since gava will never default. Therefore, the lowest return one should expect is the gava bond return. If the gava bond is say 10%, why should you lend someone at less than that? It is also called the risk free rate (alpha rate)
Any return above alpha is dependent on how you perceive the borrower’s. Barclays will lend EABL at 12%, while it will lend you at 23% because you are a riskier prospect to them. The number loaded on top of the alpha (2% for EABL and 13% for you in our example is called the beta rate).
Commercial Bank bonds are also considered low risk, Chase Bank is currently offering a bond at 13%, as it is slightly more risky than gava. I have considered the Chase Bank Bond rate be my alpha. (I don’t expect Chase to do a Euro /Trade /Delphis Bank soon).
@hobbit’s beta (in my eyes) is made up of:
- He isn’t a property mogul that’s adds to his risk
- I will make money only on rent (which isn’t 100% guaranteed) that adds to his risk
- I will be collecting the rent myself. That requires a premium for the services
I’m also insisting on variable (not fixed) interest because I don’t know how long it will take to repay the loan, and what other factors that are currently unknown will come into play (for instance, Gavana Mtarajiwa wa benki kuu might turn out to be an arch conservative who will squeeze the life out of the financial markets)
So you see, it isn’t quite Russian
