THIRD APPROXIMATION

which most economists term economic friction. The verydefinition of loan interest as one implying no risk mustnow be modified so as to imply some risk that the loanmay not be repaid in full according to the contract.Practically all of them are varieties of risk. Even inloans which theoretically are assumed to be riskless, thereis always some risk. Modern corporate finance makes nopretence that risk is completely absent, but merely con-cerns itself with providing a more or less safe margin ofprotection varying with each specific case.

Furthermore, for our present purposes, contract orexplicit interest is too narrow a concept. We now includenot only the implicit interest realized by the investor whobuys a bond, but the implicit interest realized by the in-vestor who buys preferred stock. We may even includethe rates realized on common stock, real estate, or any-thing else. Thus extended, the concept of interest be-comes somewhat vague. And yet, if we exclude exceptionalcases, there tend to emerge, at any time, several fairlydefinite market rates of interest according to the char-acter of the security.

We find quoted rates on call loans, four months primecommercial paper, prime bankers’ acceptances, first mort-gages, second mortgages, as well as rates given by savingsbanks, rates allowed on active checking accounts, pawnshop rates, Morris Plan bank rates, rates realized ongovernment bonds, railroad bonds, on other bonds,whether mortgage, debenture, or income bonds (all ofwhich bond rates vary according to the character andcredit of the issuer as well as in accordance with othercircumstances), rates realized on preferred stock, andsometimes even the rates realized on common stocks.Wherever there is a sufficiently definite rate per cent per

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