How To Know High Risk Investment Offers Using Interest Rate. The higher the risk, the higher the expected return.
How do you know if the return they are giving you is high?
Some people are finance gurus so they knew this long ago. But what about you who does not know this?
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To be able to know whether the interest rate they have offered you is high or not, you must have something you’re comparing it with right? Compare your rate to the following:
1. Treasury Bill Rate
The first thing to compare the interest rate given you with, is the treasury bill rate. The treasury bill is issued by the government and it is seen as risk free. For this reason, the least return most investors like you and I should expect is this treasury bill rate.
Use the treasury bill rate as a benchmark. The farther the rate given you is away from the treasury bill rate, the higher the risk.
They quote rates as TBill+1 or TBill+2, etc.
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2. Interest rates offered by other financial institutions on same or similar products
This gives you an idea of what the market is offering so anything far higher than what is offered by others is likely to be unsustainable.
Enoch Dzah
Investment Banking || Investment Advisor || Columnist || Pastor|| Financial Literacy Advocate ||
