THIRD APPROXIMATION

these less standardized rates and a normal rate of interestso far as this can be expressed in figures. Thus a man whohas invested $100,000 in common stock and is getting anincome of $15,000 may think of $5,000 of this, or 5 percent, as a fair interest on his investment and the remain-ing $10,000, or 10 per cent, as net profit. But we do notneed here to enter into such discussions, especially in sofar as they are only verbal. All that is here needed is toshow briefly how risk modifies the theoretically perfectdetermination of the interest rate thus far made.

The rate in every loan contract is adjusted accordingto the degree of security given. Thus, security or guaran-tee may be furnished by a simple endorsement of reput-able persons, in which case the degree of security willbe the greater the larger the number of endorsers andthe higher the credit which they possess, or it may beby the deposit of collateral securities. Thus the veryname security has come to mean the properties them-selves rather than their safety.

If we pass from explicit interest, or the rate of interestinvolved in a loan contract, to implicit interest, or therate involved in purchases and sales of property in gen-eral, we see again that the greater the risk, the higher thebasis on which a security will sell. A gilt-edge securitymay sell on a 3 per cent basis, when a less known or lesssalable security may sell only on a 6, or even on a 9 percent basis. 1

The period of time a loan or bond runs is also animportant factor as regards risk. 2 There is a see-saw be-

1 For a more complete treatment of the relation of risk to the interestyield of securities, see The Nature of Capital and Income, Chapter XVI.

2 Even in the first and second approximations the rate of interest fordifferent periods would not necessarily be the same.

[209]