Option (finance)

“ If he did, the price would rise; he does not because he thinks that the price is at a fair level, and being at a fair level, is just as likely to fall as to rise. As the price is the basis of the option operation, he charges exactly the same for taking the chance of its rising as of its falling. ”

“ If he exercises a put option, he has then to deliver the shares and receive the money. Except in very peculiar circumstances, the option dealer, the taker of the money for the option, will know, when the term arrives, whether it will be exercised or not by merely comparing the existing market price with the option price. A call is not likely to be exercised if the shares can be bought much more cheaply in the market, nor is a put likely to be exercised if the shares can be sold at a much higher price in the market. ”

“ The option should be taxable as income when given, and any subsequent gain through appreciation of the stock, whether realized by sale of the option. if transferable, or by sale of the stock acquired by its exercise, is attributable to the sale of a capital asset and, if the other requirements are satisfied, sould be taxed as a capital gain. [1] Any other result makes the division of the total gains between ordinary income (compensation) and capital gain (sale of an asset) dependent solely upon the fortuitous circumstance of when the employee exercises his option. ”

“ The most common case of the "bearer of options" function arises when men hold money, liquid securities of low yield and stable value, short loans, call loans, or bank-deposits, waiting for special opportunities in the market. ”

“ If, by paying four per cent as interest, the merchant, in the illustrative case, makes over to the lender of capital that part of the increase of goods that by the law of interest falls to him, four [Pg 548] per cent is the rate that the loan in money will bring. This is on the supposition that the change in the purchasing power of money is perfectly steady. If it is unsteady, effects will follow that are of much consequence. ”

“ The Rate of Interest depends on the Demand and Supply of Loans. The two topics of Currency and Loans, though in themselves distinct, are so intimately blended in the phenomena of what is called the money market, that it is impossible to understand the one without the other, and in many minds the two subjects are mixed up in the most inextricable confusion. ”

“ The capital of those who live on the interest of their own fortunes, has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.
§ 3.⁠Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. ”

“ The moneyed capital thus employed is invested for that purpose in securities by way of loan, discount, or otherwise, which are from time to time, according to the rules of the business, reduced again to money and reinvested. ”

“ A widow, or a trustee, or other long-time investor, would prefer to buy bonds which guaranteed a regular yearly purchasing power over subsistence, rather than those which merely promised a given sum of money of uncertain value. ”

“ The public funds, shares in joint-stock companies, and all descriptions of securities, are at a high price in proportion as the rate of interest is low. They are sold at the price which will give the market rate of interest on the purchase money, with allowance for all differences in the risk incurred, or in any circumstance of convenience. Exchequer bills, for example, usually sell at a higher price than consols, proportionally to the interest which they yield ”

“ I am not the man to urge you to it. What do you want with money-making? But if you say to me, 'Ehrenthal, I will set up a factory,' why, I have capital for you as much as you like. I myself have a sum of ten thousand dollars ready; you may have it any day. And now I will make a proposal. I will get you the money you want, at a moderate rate of interest; and for the money I myself advance, you shall give me a share of the business until you are able to repay the sum. Should you require further money, you must take a mortgage on your property until you can replace the whole. ”

“ With the third method a permanent increase is secured in the capital funds available for use in the business. Financial policy, governed by the needs of the business and its markets, will always dictate the method to be used for extinguishing or contracting a debt. ”

“ One is the right to demand and receive at maturity the principal amount of the bond representing capital investment. The other is the right to demand and receive interim payments of interest on the investment in the amounts and on the dates specified by the coupons. ”

“ Or, lastly, there is another process by which, in England and other commercial countries, a large portion of the requisite supply of loans is obtained. Instead of its being afforded by persons not in business, the affording it may itself become a business. A portion of the capital employed in trade may be supplied by a class of professional money lenders. These money lenders, however, must have more than a mere interest; they must have the ordinary rate of profit on their capital, risk and all other circumstances being allowed for. ”

“ It must not be forgotten that what is really loaned is capital,—commodities in general,—not money; the money is only a medium for effecting the transfer, and a measure of the capital transferred. What should be returned, therefore, in repayment of a loan is the same amount of commodities in general that was borrowed,—the same value. ”

“ The lender, who thus receives in money the full market value of the shares-much more than he would ordinarily realize by pledging them-usually pays interest on the money so received, at the current rate for demand loans. But the rate of interest is a matter of negotiation and agreement, and the deposit may, on occasion, carry no interest, or the borrower of the stock may pay a premium when the stock is greatly in demand. ”

“ Whether a bank lent one million, ten millions, or a hundred millions, they would not permanently alter the market rate of interest; they would alter only the value of the money which they thus issued. In one case 10 or 20 times more money might be required to carry on the same business, than what might be required in the other. ”

“ The company mortgages its property for a certain sum, too large for a single person to advance, so it is divided up into even amounts of, say, £100, the money being secured by de- benture bonds, bearing interest at a fixed rate, and being saleable in the stock markets. ”

“ The only ways in which the money price of a bond or salable debt can vary at all are by variations in the rate of money interest and by changes in the degree of certainty of payment. Only so far as these features are affected by the changes in the volume of money will the value of bonds be affected. ”

“ Interest is determined by the amount of capital seeking investment in loans, relative to the demand, and in a time of relative contraction of the volume of money, and consequent falling prices, will, as a rule, be low, since there is less inducement for men to borrow capital to engage in business, and more men wishing to lend. ”

“ Manufacturer, you have summarized the discussion upon credit remarkably well, I think.
Mr. Merchant: So do I, and I am sure that we all understand what constitutes the difference between the right and wrong basis of demand obligation—convertibility or non-convertibility—quick assets or slow assets—the commercial fund and the investment fund. If we keep this thought steadily in view it will help us amazingly when [Pg 193] we come to draw a banking bill demanding the recognition of this fundamental distinction. ”

“ Interest on Partners’ Loans.—Careful differentiation must be made between interest on partners’ capitals and on partners’ loans. If a loan is secured from outside parties, its interest cost is a business expense, to be taken into account before determining net profits. ”

“ The objections usually urged against credit-money are considered and found untenable, the claim that interest naturally accrues to capital is disputed at each successive stand-point, and in the concluding remarks an explanation is given of the present excess of supply over the demand of commodities and service, confirming the conclusion that the correction of this abnormal state is contingent upon the financial measure suggested. ”

“ But he may make purchases with money which he only expects to have, or even only pretends to expect. He may obtain goods in return for his acceptances payable at a future time, or on his note of hand, or on a simple book-credit—that is, on a mere promise to pay. All these purchases have exactly the same effect on price as if they were made with ready money. The amount of purchasing power which a person can exercise is composed of all the money in his possession or due to him, and of all his credit. ”

“ I know the intrinsic value of the chief securities in the market, so, by lending conservatively and keeping an eye on the Stock Exchange, I can realise at once in case of a decline if sufficient margin is not instantly placed in my possession to protect the loan. ”

“ Here the loan is made on the basis of an anticipated income. Here again the anticipated income is made possible only by the loan; one of the values that enters into the exchange exists only because the exchange is possible. None the less, the credit rests on value. It is a right to an anticipated income. The man who has made the loan has his security in the value which he has lent, plus the present worth of the extra income which the new idea is expected to create. ”

“ Almost all loans at interest are made in money, either of paper, or of gold and silver; but what the borrower really wants, and what the lender readily supplies him with, is not the money, but the money's worth, or the goods which it can purchase. If he wants it as a stock for immediate consumption, it is those goods only which he can place in that stock. If he wants it as a capital for employing industry, it is from those goods only that the industrious can be furnished with the tools, materials, and maintenance necessary for carrying on their work. ”

“ The money in the hands of lenders, in common with all other money, will be enhanced in value, that is, there will be a greater amount of real capital seeking borrowers; while the real capital wanted by borrowers will be only the same as before, and the money amount less: the rate of interest, therefore, will tend to fall. ”

“ Other efficient, but somewhat more costly, agencies for bringing together the owners of loanable capital and men wishing to use capital are savings-banks, building and loan associations, insurance companies issuing endowment policies, and mortgage-investment companies of many kinds. While on the one side of the bidding are thousands of lenders offering to exchange ready money for assured incomes, on the other are thousand of borrowers offering to exchange the promise of assured incomes for ready money. ”

“ Rather than stop payment, he will, of course, make temporary sacrifices—will give high terms to whoever will furnish him with the desired means. If, by depositing securities with his banker, he can get a loan at an advanced rate of interest, well. If not, by offering an adequate temptation, he may mortgage his property to some one having good credit; who either gives bills, or draws on his banker for the sum agreed to. In either case, extra promises to pay are issued; or, if the difficulty is met by accommodation-bills, the same result follows. ”

“ In a building and loan association the money is put up at auction, usually in open meeting on the night or at the time of the payment of dues. Those who wish to borrow bid a premium above the regular rate of interest charged, and the one who bids the highest premium is awarded the loan. The man who wishes to build his house, therefore, and desires to borrow $1,000, must have five shares of stock in his association, must bid the highest premium, and then the $1,000 will be loaned to him. ”

“ The value of this residuary share may be large or small, may increase or diminish, but in no case can the holder of such a share require any one, least of all the company itself, to redeem the certificate representing his interest at the price he paid for it, nor indeed at any price. If a man buys a $1,000 railroad bond, he knows that the railroad, if solvent, will pay him $1,000 in cash when the bond is due. ”

“ The lender must also, in estimating net interest, count the cost of placing, supervising, and collecting the loan. A pawnbroker lends only small sums and spends much time and effort to keep at interest a moderate capital. Five thousand dollars loaned in sums averaging ten dollars represents five hundred transactions, and yet if placed at five per cent, it yields but two hundred and fifty dollars a year. ”

“ If you prefer the one year loan I shall ask you to reduce your note to $5300 which makes the interest the regular 6%. I do not wish to make any money out of you, the principal things I have in view being to help you and at the same time to be well secured in my investments—this because my fortune is very limited and my time for acquiring wealth past. ”

“ Bonds, real-estate mortgages, and loans on collateral represent somebody's promise to pay a certain sum of money at a future date; and if the promise be good and the security ample, the holder of the promise will be paid the money at the time due. On the other hand, equities, such as the capital stocks of banking, railway, and industrial corporations, represent only a certain residuary share in the assets and profits of a working concern, after payment of its obligations and fixt charges. ”

“ He must agree to repay the loan in goods of the same kind and quality as those received, a contract most difficult to execute, and giving occasion to costly tests and countless disagreements. It was much easier for the merchant to get his loan under the interest contract, i.e., a money loan, with which to buy the goods. With the growth of industry and commerce, wealth increased in towns, taking many forms, as those of ships, wagons, tools, and stocks of goods, that could not conveniently be rented. ”