Everything You Need to Know About Interest Rates in One Book

Interest in interest rates is higher than ever.
People who lived in an era of zero or near-negative interest rates for quite some time took out loans at low interest rates to buy houses and invest in stocks and bonds.
Then, suddenly, the interest rates rose, doubling or tripling the interest rates on loans, leaving people at a loss, and people rushing to the bank with bundles of cash to take advantage of the high interest rates they had not seen in a long time. This caused a series of shocking scenes.
It is now common knowledge that the 'giant step' refers not to the elephant's footsteps, but to the large-scale interest rate hikes in the United States.
So how are interest rates determined? Why does the world so reluctantly follow US interest rate decisions? Are interest rate hikes always bad? When interest rates rise, is it better to invest in bonds or stocks? Interest rates are deeply ingrained in the global economy, national economies, and individual lives.
Even in the proverbs we are familiar with, the topic of interest rates is never left out.
That's why the monkey asked for four acorns in the morning instead of in the evening.
Even the monkey knew.
Interest rates are the value of time for money.
Everything you didn't know about interest rates.
Let's find out through this book.

There are many stories about interest in the East as well.
A representative example is the story related to ‘Josammosa’.
There was a man named Jeogong in the Song Dynasty who raised monkeys.
One day, when the monkey was running low on food, he asked the monkey, “How about giving me three acorns in the morning and four in the evening?”
Then the monkeys got up and started protesting, saying that they were hungry because they didn't eat enough acorns in the morning.
The low-ranking official spoke again.
“Then how about giving them four acorns in the morning and three in the evening?” It is said that only then did the monkeys jump for joy.
The old saying 'Josammosa' is often cited to criticize the foolishness of people who only think about what's right in front of them.
It's the same thing as getting 7 acorns in total, but giving 4 acorns first doesn't increase the amount of food.
The story of Jo Sam-mo-sa is also cited to criticize those in power who use their tongues to deceive people.
But from an economic point of view, monkeys are geniuses.
This is because interest exists.

--- p.16

In a monetary economy where the government prints and manages money, the concept of interest rates becomes more evident than when trading in gold.
As explained earlier, the nominal interest rate, expressed in terms of the value of money, is equal to the real interest rate resulting from time preference plus the expected inflation rate.
For example, if the real interest rate is 5% and the expected inflation rate is 3%, the nominal interest rate is 8%.
However, when calculating the expected inflation rate, the amount of money is an important variable.
If the government increases the money supply by 10%, the inflation rate is likely to be close to 10%.
In particular, the government, which manages the amount of money, can calculate the inflation rate a little more accurately than the private sector.
The government knows exactly how much currency it has printed, but it does not disclose this information to individuals, resulting in a discrepancy in information between individuals and the government regarding inflation calculations.
Therefore, the government can intervene in the financial market by increasing or decreasing the money supply through policy.

--- p.38

It may seem like banks are just sitting back and making money, but there's actually a lot more work to be done.
Banks need to attract depositors by offering interest to those with money to spare.
And you also need to calculate how often, on average, people who have entrusted money withdraw their money.
This is the concept of 'average maturity'.
Once this calculation is complete, it is determined how much money can be loaned.
After that, they lend money to people who want to borrow money.
You also need to constantly check whether the people you lend money to are paying it back properly, and if they don't, you need to think about how to recover the money you lent.
For example, when a borrower does not repay the money, they may promise to sell the borrower's house or property, or when a borrower does not repay the money, they may obtain a promise from someone else to repay the money on their behalf.
This is where the concepts of ‘collateral’ and ‘joint guarantee’ came into being.

--- p.44

McDonald's sells a hamburger called the 'Big Mac' in Korea and the United States.
Anyone who has tried a Big Mac knows that there is not much difference in quality and quantity between Big Mac hamburgers in Korea and the United States.
If so, the value should also be similar.
In February 2023, the price of a Big Mac in Korea was 4,400 won, and in the US, it was $5.30 (6,863 won when the won-dollar exchange rate of 1,295 won is applied).
Since the value of the same item is evaluated in the currencies of both countries, it is common sense to exchange money at the rate (4,400 won for 5.3 dollars).
According to this ratio, the won-dollar exchange rate is approximately 830 won per dollar.
However, on the same day, the won-dollar exchange rate announced by the bank in the foreign exchange market was 1,295 won, which was 400 won higher than the exchange rate evaluated by the Big Mac Index.
This means that if you exchange money at this exchange rate and buy a Big Mac in the US, you will have to pay 2,400 won more than you would in Korea.

--- p.121

It is also true that during the period of quantitative easing, liquidity released in the United States flowed into emerging countries, creating an asset bubble.
Moreover, the announcement of a reduction in quantitative easing caused emerging market exchange rates to surge and asset prices to plummet in the global market, significantly impacting the overall economy.
It has always been the case that all decisions in the United States revolve around the United States, and that monetary policy is determined with the US economy as the top priority.
This is best illustrated by the remark of U.S. Treasury Secretary John Connally in the early 1970s: “The dollar is our currency, but it’s your problem.”
The amount of dollars printed and the interest rate will be determined based on the circumstances in the United States, so other countries should respond 'as they see fit.'
I always feel this way, but reality is cold.
--- p.160

The biggest difference with the United States is that China is not experiencing inflation.
China's consumer price index in December 2022 rose only 1.8% year-on-year.
In January 2023, prices rose slightly to 2.1%.
Comparing the same period, the United States recorded 6.5% in December 2022 and 6.4% in January 2023.
This is a considerably lower figure compared to the 9.1% increase in June 2022 and the 8.2% increase in September.
Therefore, the United States must control inflation without hesitation, while China, which has abandoned its containment policy and shifted to a reopening policy, faces the immediate challenge of reviving its economy.
--- p.208

When we distinguish between technology and value stocks, technology stocks often take a bigger hit during periods of rising interest rates.
Technology stocks are companies with high future growth potential, such as ICT companies, big tech companies, fintech companies, and artificial intelligence companies.
Compared to value stocks, the stable earnings base is weaker, and the proportion of external borrowings is higher in the process of expanding investment.
Therefore, when interest rates rise, the financial cost burden increases.
Additionally, during periods of rising interest rates, the economy is likely to stagnate or enter a recession, leading to a decline in sales and corporate activity.
For this reason, stocks classified as technology stocks tend to see a relatively larger decline in stock prices during periods of rising interest rates.

--- p.228

If the sale of a small building or commercial building is conducted normally, it is reasonable that the rental yield becomes the most important criterion.
Based on the building price, the rental yield should be at the level of the regular deposit interest rate, or if a loan is taken out, the loan interest rate level should be reflected.
Over the past few years, rental yields in the Seoul area have been low, averaging 2-3%, although this varies by region.
In addition, the vacancy rate has increased due to the impact of COVID-19, and restaurants have shown a tendency to reduce their rental store space due to increased demand for delivery.

Unlike apartments, small and medium-sized buildings can be considered unlisted properties in the real estate market.
Each building has different conditions, making standardization impossible, and the structure, region, direction, and number of floors vary greatly.
Therefore, it is difficult to estimate the price and it is difficult to conclude a transaction easily.
Therefore, the most important criterion for evaluating profitability in commercial buildings, including small and medium-sized buildings, is rental yield.

--- p.238

The right to demand interest rate reductions is guaranteed by the Banking Act and is a right borrowers can apply for from both primary and secondary financial institutions, including savings banks, credit card companies, and insurance companies.
The most important thing is to demonstrate that your current repayment ability has improved compared to when you first took out the loan.
If your income has increased through a promotion, job change, or professional certification, or if your assets have increased through increased assets or reduced debt, you may want to consider applying for a lower interest rate.
If your personal credit score, as assessed by a credit rating agency, has improved, you are more likely to be accepted.
Of course, each bank has different conditions and each individual's circumstances are different, so the amount by which the interest rate can be lowered will vary depending on the case.

--- p.256

Starbucks uses various marketing methods, such as points and gold levels, to encourage customers to increase their prepaid balance.
Gift cards, or coffee vouchers that you purchase for a certain amount of money, are similar in concept to prepaid recharges.
As of the end of 2022, Starbucks' prepaid balance amounted to 298.3 billion won, a 19% increase from 2021 (250.3 billion won).
The number of members is said to have exceeded 10 million.
Starbucks is investing this capital primarily in asset-backed commercial paper (ABCP). ABCP refers to commercial paper (CP) issued with various assets as collateral, such as accounts receivable, asset-backed securities, and mortgage-backed securities.
As of April 2023, the ABCP interest rate is around 4.5% for the three-month average of A1, the highest credit rating, and around 9% for the three-month average of A2.

--- p.266