Interest has its own interest - cultural, historical, mathematical. In this post I'd like to point out the vague irrelevancy we like to attribute to it in our everyday lives. Interest rates for loans to the safest bet have most often been somewhere around the 5% level, give or take. I think for many people this is psychologically around the 'fee' scale - we're all used to banks and other money institutions (pension providers, insurance companies, etc.) charging fees with are in the same ball park. We are also mostly dimly aware of the role of inflation on money - we all dimly know that the meaning of 5% is itself in some general way clouded or constrained by the inflation level, so that gives us an even further excuse to consider the difference between, say 5% and 5.5% as not significant.
For banks and those dealing with fixed income products, like bond traders, their discrimination levels need to be a lot finer. The reason is because they're usually applying it to much larger sums. The only time in most of our lives where we get to play with large sums is when buying a house. Here, we often come to appreciate the difference in meaning from a 5% payback rate and a 5.5% payback rate. What we're doing, in our heads, is spelling out the meaning of that 0.5% with respect to a large sum. Say our house costs £100,000. Then that 0.5% amounts to £500. If that was an annual additional payment, then the corresponding monthly payment would be about £42, or a meal for two in a restaurant. Whereas if you're buying £100,000,000 worth of a convertible issue, then that 0.5% amounts to half a million pounds. And if you earn less than a pound per day, that 0.5% is the least of your worries.
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