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Time,andCapitalMarkets(微观经济学-华侨大学,Je2024/3/26Time,andCapitalMarkets(微观经济学华侨大学,JeTopicstobeDiscussedStocksVersusFlowsPresentDiscountedValueTheValueofaBondTheNetPresentValueCriterionforCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeTopicstobeDiscussedAdjustmentsforRiskInvestmentDecisionsbyConsumersIntertemporalProductionDecisions---DepletableResourcesHowareInterestRatesDetermined?Time,andCapitalMarkets(微观经济学华侨大学,JeIntroductionCapitalChoosinganinputthatwillcontributetooutputoveralongperiodoftimeComparingthefuturevaluetocurrentexpendituresTime,andCapitalMarkets(微观经济学华侨大学,JeStocksVersusFlowsStockCapitalisastockmeasurement.TheamountofcapitalacompanyownsTime,andCapitalMarkets(微观经济学华侨大学,JeStocksVersusFlowsFlowsVariableinputsandoutputsareflowmeasurements.AnamountpertimeperiodTime,andCapitalMarkets(微观经济学华侨大学,JePresentDiscountedValue(PDV)DeterminingthevaluetodayofafutureflowofincomeThevalueofafuturepaymentmustbediscountedforthetimeperiodandinterestratethatcouldbeearned.Time,andCapitalMarkets(微观经济学华侨大学,JePresentDiscountedValue(PDV)FutureValue(FV)Time,andCapitalMarkets(微观经济学华侨大学,JePresentDiscountedValue(PDV)QuestionWhatimpactdoesRhaveonthePDV?Time,andCapitalMarkets(微观经济学华侨大学,JePDVof$1PaidintheFuture0.01 $0.990 $0.980 $0.951 $0.905 $0.820 $0.7420.02 0.980 0.961 0.906 0.820 0.673 0.5520.03 0.971 0.943 0.863 0.744 0.554 0.4120.04 0.962 0.925 0.822 0.676 0.456 0.3080.05 0.952 0.907 0.784 0.614 0.377 0.2310.06 0.943 0.890 0.747 0.558 0.312 0.174InterestRate 1Year 2Years 3Years 4Years 5Years 6YearsTime,andCapitalMarkets(微观经济学华侨大学,JePDVof$1PaidintheFuture0.07 0.935 0.873 0.713 0.508 0.258 0.1310.08 0.926 0.857 0.681 0.463 0.215 0.0990.09 0.917 0.842 0.650 0.422 0.178 0.0750.10 0.909 0.826 0.621 0.386 0.149 0.0570.15 0.870 0.756 0.497 0.247 0.061 0.0150.20 0.833 0.694 0.402 0.162 0.026 0.004InterestRate 1Year 2Years 3Years 4Years 5Years 6YearsTime,andCapitalMarkets(微观经济学华侨大学,JePresentDiscountedValue(PDV)ValuingPaymentStreamsChoosingapaymentstreamdependsupontheinterestrate.Time,andCapitalMarkets(微观经济学华侨大学,JeTwoPaymentStreamsPaymentStreamA: $100 $100 0PaymentStreamB:
$20 $100 $100Today 1Year 2YearsTime,andCapitalMarkets(微观经济学华侨大学,JeTwoPaymentStreams
Time,andCapitalMarkets(微观经济学华侨大学,JePDVofPaymentStreamsPDVofStreamA: $195.24 $190.90 $186.96 $183.33PDVofStreamB:
205.94 193.54 182.57 172.77R=.05 R=.10 R=.15 R=.20WhydoesthePDVofA
relativetoBincreaseas
RincreasesandviceversaforB?Time,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarningsPDVcanbeusedtodeterminethevalueoflostincomefromadisabilityordeath.Time,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarningsScenarioHaroldJenningsdiedinanautoaccidentJanuary1,1986at53yearsofage.Salary:$85,000RetirementAge:60Time,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarningsQuestionWhatisthePDVofJennings’lostincometohisfamily?Mustadjustsalaryforpredictedincrease(g)Assumean8%averageincreaseinsalaryforthepast10yearsTime,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarningsQuestionWhatisthePDVofJennings’lostincometohisfamily?Mustadjustforthetrueprobabilityofdeath(m)fromothercausesDerivedfrommortalitytablesTime,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarningsQuestionWhatisthePDVofJennings’lostincometohisfamily?AssumeR=9%Rateongovernmentbondsin1983Time,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarnings
Time,andCapitalMarkets(微观经济学华侨大学,JeCalculatingLostWages1986 $85,000 .991 1.000 $84,2351987 91,800 .990 .917 83,3391988 99,144 .989 .842 82,5611989 107,076 .988 .772 81,6711990 115,642 .987 .708 80,8101991 124,893 .986 .650 80,0431992 134,884 .985 .596 79,1851993 145,675 .984 .547 78,408Year W0(1+g)t (1-mt) 1/(1+R)t
W0(1+g)t(1-mt)/(1+R)tTime,andCapitalMarkets(微观经济学华侨大学,JeTheValueofLostEarningsFindingPDVThesummationofcolumn4willgivethePDVoflostwages($650,252)Jennings’familycouldrecoverthisamountascompensationforhisdeath.Time,andCapitalMarkets(微观经济学华侨大学,JeTheValueofaBondDeterminingthePriceofaBondCouponPayments=$100/yr.for10yrs.PrincipalPayment=$1,000in10yrs.Time,andCapitalMarkets(微观经济学华侨大学,JePresentValueof
theCashFlowfromaBondInterestRatePDVofCashFlow($thousands)00.050.100.150.200.51.01.52.0Whydoesthevaluedeclineastherateincreases?Time,andCapitalMarkets(微观经济学华侨大学,JeTheValueofaBondPerpetuitiesPerpetuitiesarebondsthatpayoutafixedamountofmoneyeachyear,forever.Time,andCapitalMarkets(微观经济学华侨大学,JeEffectiveYieldonaBondCalculatingtheRateofReturnFromaBondTime,andCapitalMarkets(微观经济学华侨大学,JeEffectiveYieldonaBondCalculatingtheRateofReturnFromaBondTime,andCapitalMarkets(微观经济学华侨大学,JeEffectiveYieldonaBondInterestRate00.050.100.150.200.51.01.52.0PDVofPayments(ValueofBond)($thousands)Whydoyieldsdifferamongdifferentbonds?Theeffectiveyieldistheinterestratethatequatesthepresentvalueofabond’spaymentstreamwiththebond’smarketprice.Time,andCapitalMarkets(微观经济学华侨大学,JeTheYieldsonCorporateBondsInordertocalculatecorporatebondyields,thefacevalueofthebondandtheamountofthecouponpaymentmustbeknown.AssumeIBMandPolaroidbothissuebondswithafacevalueof$100andmakecouponpaymentseverysixmonths.Time,andCapitalMarkets(微观经济学华侨大学,JeTheYieldsonCorporateBondsClosingpricesforeachJuly23,1999:IBM 53/809 5.8 30 92-11/2
Polaroid111/206 10.8 80106-5/8
a:couponpaymentsforoneyear($5.375)b:maturitydateofbond(2009)c:annualcoupon/closingprice($5.375/92)d:numbertradedthatday(30)e:closingprice(92)f:changeinpricefrompreviousday(-11/2) ab c d efTime,andCapitalMarkets(微观经济学华侨大学,JeTheYieldsonCorporateBondsTheIBMbondyield:Assumeannualpayments2009-1999=10yearsTime,andCapitalMarkets(微观经济学华侨大学,JeTheYieldsonCorporateBondsThePolaroidbondyield:WhywasPolaroidR*greater?Time,andCapitalMarkets(微观经济学华侨大学,JeTheNetPresentValueCriterion
forCapitalInvestmentDecisionsInordertodecidewhetheraparticularcapitalinvestmentisworthwhileafirmshouldcomparethepresentvalue(PV)ofthecashflowsfromtheinvestmenttothecostoftheinvestment.Time,andCapitalMarkets(微观经济学华侨大学,JeNPVCriterionFirmsshouldinvestifthePVexceedsthecostoftheinvestment.TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,Je
TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeTheElectricMotorFactory(choosingtobuilda$10millionfactory)8,000motors/monthfor20yrsCost=$42.50eachPrice=$52.50Profit=$10/motoror$80,000/monthFactorylifeis20yearswithascrapvalueof$1millionShouldthecompanyinvest?TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeAssumeallinformationiscertain(norisk)R=governmentbondrateTheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeNetPresentValueofaFactoryInterestRate,R00.050.100.150.20-6NetPresentValue($millions)-4-20246810TheNPVofafactoryisthepresentdiscountedvalueofallthecashflowsinvolvedinbuildingandoperatingit.R*=7.5Time,andCapitalMarkets(微观经济学华侨大学,JeRealversusNominalDiscountRatesAdjustingfortheimpactofinflationAssumeprice,cost,andprofitsareinrealtermsInflation=5%TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeRealversusNominalDiscountRatesAssumeprice,cost,andprofitsareinrealtermsTherefore,P=(1.05)(52.50)=55.13,Year2P=(1.05)(55.13)=57.88….C=(1.05)(42.50)=44.63,Year2C=….Profitremains$960,000/yearTheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeRealversusNominalDiscountRatesRealR=nominalR-inflation=9-5=4TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeNetPresentValueofaFactoryInterestRate,R00.050.100.150.20-6NetPresentValue($millions)-4-20246810IfR=4%,theNPVispositive.Thecompanyshouldinvestinthenewfactory.Time,andCapitalMarkets(微观经济学华侨大学,JeNegativeFutureCashFlowsInvestmentshouldbeadjustedforconstructiontimeandlosses.TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeElectricMotorFactoryConstructiontimeis1year$5millionexpendituretoday$5millionexpenditurenextyearExpectedtolose$1millionthefirstyearand$0.5millionthesecondyearProfitis$0.96million/yr.untilyear20Scrapvalueis$1millionTheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,Je
TheNetPresentValueCriterion
forCapitalInvestmentDecisionsTime,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskDeterminingthediscountrateforanuncertainenvironment:Thiscanbedonebyincreasingthediscountratebyaddingarisk-premiumtotherisk-freerate.Ownersareriskaverse,thusriskyfuturecashflowsareworthlessthanthosethatarecertain.Time,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskDiversifiableVersusNondiversifiableRiskDiversifiableriskcanbeeliminatedbyinvestinginmanyprojectsorbyholdingthestocksofmanycompanies.Nondiversifiableriskcannotbeeliminatedandshouldbeenteredintotheriskpremium.Time,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskMeasuringtheNondiversifiableRiskUsingtheCapitalAssetPricingModel(CAPM)Supposeyouinvestintheentirestockmarket(mutualfund)rm=expectedreturnofthestockmarketrf=riskfreeraterm-rf=riskpremiumfornondiversifiableriskTime,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskMeasuringtheNondiversifiableRiskUsingtheCapitalAssetPricingModel(CAPM)CalculatingRiskPremiumforOneStockTime,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskQuestionWhatistherelationshipbetweenthenondiversifiableriskandthevalueoftheassetbeta?Time,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskGivenbeta,wecandeterminethecorrectdiscountratetouseincomputinganasset’snetpresentvalue:Time,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskDeterminingbetaStockEstimatedstatisticallyforeachcompanyTime,andCapitalMarkets(微观经济学华侨大学,JeAdjustmentsforRiskDeterminingbetaFactoryWeightedaverageofexpectedreturnonthecompany’sstockandtheinterestonthedebtExpectedreturndependsonbetaCaution:TheinvestmentshouldbetypicalforthecompanyTime,andCapitalMarkets(微观经济学华侨大学,JeInvestmentDecisionsbyConsumersConsumersfacesimilarinvestmentdecisionswhentheypurchaseadurablegood.ComparefuturebenefitswiththecurrentpurchasecostTime,andCapitalMarkets(微观经济学华侨大学,JeBenefitsandCostofBuyingaCarS=valueoftransportationservicesindollarsE=totaloperatingcost/yrPriceofcaris$20,000Resalevalueofcaris$4,000in6yearsInvestmentDecisionsbyConsumersTime,andCapitalMarkets(微观经济学华侨大学,JeBenefitsandCostInvestmentDecisionsbyConsumersTime,andCapitalMarkets(微观经济学华侨大学,JeChoosinganAirConditionerBuyinganewairconditionerinvolvesmakingatrade-off.AirConditionerALowpriceandlessefficient(highoperatingcost)Time,andCapitalMarkets(微观经济学华侨大学,JeChoosinganAirConditionerBuyinganewairconditionerinvolvesmakingatrade-off.AirConditionerBHighpriceandmoreefficientBothhavethesamecoolingpowerAssumean8yearlifeTime,andCapitalMarkets(微观经济学华侨大学,JeChoosinganAirConditioner
Time,andCapitalMarkets(微观经济学华侨大学,JeChoosinganAirConditionerShouldyouchooseAorB?DependsonthediscountrateIfyouborrow,thediscountratewouldbehighProbablychoosealessexpensiveandinefficientunitIfyouhaveplentifulcash,thediscountratewouldbelow.ProbablychoosethemoreexpensiveunitTime,andCapitalMarkets(微观经济学华侨大学,JeIntertemporalProduction
Decisions---DepletableResourcesFirms’productiondecisionsoftenhaveintertemporalaspects---productiontodayaffectssalesorcostsinthefuture.Time,andCapitalMarkets(微观经济学华侨大学,JeScenarioYouaregivenanoilwellcontaining1000barrelsofoil.MCandAC=$10/barrelShouldyouproducetheoilorsaveit?IntertemporalProduction
Decisions---DepletableResourcesTime,andCapitalMarkets(微观经济学华侨大学,JeScenarioPt=priceofoilthisyearPt+1=priceofoilnextyearC=extractioncostsR=interestrate
IntertemporalProduction
Decisions---DepletableResourcesTime,andCapitalMarkets(微观经济学华侨大学,JeDonotproduceifyouexpectitspricelessitsextractioncosttorisefasterthantherateofinterest.Extractandsellallofitifyouexpectpricelesscosttoriseatlessthantherateofinterest.Whatwillhappentothepriceofoil?IntertemporalProduction
Decisions---DepletableResourcesTime,andCapitalMarkets(微观经济学华侨大学,JePriceofanExhaustibleResourceTimePriceQuantityPriceccMarginalExtractionCostTPTP0P-cP0DemandTime,andCapitalMarkets(微观经济学华侨大学,JeInacompetitivemarket,Price-MCmustriseatexactlytherateofinterest.Why?Howwouldproducersreactif:P-CincreasesfasterthanR?P-CincreasesslowerthanR?PriceofanExhaustibleResourceTime,andCapitalMarkets(微观经济学华侨大学,JeNoticeP>MCIsthisacontradictiontothecompetitiverulethatP=MC?Hint:
Whathappenstotheopportunitycostofproducinganexhaustibleresource?PriceofanExhaustibleResourceTime,andCapitalMarkets(微观经济学华侨大学,JeP=MCMC=extractioncost+usercostUsercost=P-marginalextractioncostPriceofanExhaustibleResourceTime,andCapitalMarkets(微观经济学华侨大学,JeHowwouldamonopolistchoosetheirrateofproduction?Theywillproducesothatmarginalrevenuerevenuelessmarginalcostrisesatexactlytherateofinterest,or(MRt+1-c)=(1+R)(MRt-c)PriceofanExhaustibleResourceTime,andCapitalMarkets(微观经济学华侨大学,JeThemonopolistismoreconservationistthanacompetitiveindustry.Theystartoutchargingahigherpriceanddepletetheresourcesmoreslowly.PriceofanExhaustibleResourceResourceProductionbyaMonopolistTime,andCapitalMarkets(微观经济学华侨大学,JeHowDepletableAre
DepletableResources?Crudeoil .4to.5Naturalgas .4to.5Uranium .1to.2Copper .2to.3Bauxite .05to.2Nickel .1to.2IronOre .1to.2Gold .05to.1Resource UserCost/CompetitivePriceTime,andCapitalMarkets(微观经济学华侨大学,JeThemarketstructureandchangesinmarketdemandhavehadaverydramaticimpactonresourcepricesoverthepastfewdecades.QuestionWhywouldoilandnaturalgashavesuchahighusercostratiocomparedtotheotherresources?HowDepletableAre
DepletableResources?Time,andCapitalMarkets(微观经济学华侨大学,JeHowAreInterestRatesDetermined?Theinterestrateisthepricethatborrowerspaylenderstousetheirfunds.Determinedbysupplyanddemandforloanablefunds.Time,andCapitalMarkets(微观经济学华侨大学,JeSHouseholdssupplyfundstoconsumemoreinthefuture;thehighertheinterestrate,themoretheysupply.SupplyandDemandforLoanableFundsQuantityofLoanableFundsRInterestRateDTR*Q*DT=DH+DFandequilibriuminterestrateisR*.DHDFDHandDF,thequantitydemandedforloanablefundsbyhouseholds(H)andfirms,respectively,variesinverselywiththeinterestrate.Time,andCapitalMarkets(微观经济学华侨大学,JeChangesInTheEquilibriumSDTR*Q*Duringarecessioninterestratesfallduetoadecreaseinthedemandforloanablefunds.D’TQ1R1QuantityofLoanableFundsRInterestRateTime,andCapitalMarkets(微观经济学华侨大学,JeChangesInTheEquilibriumSDTR*Q*Whenthefederalgovernmentrunslargebudgetdeficitsthedemandforloanablefundsincrease.Q2R2D’TQuantityofLoanable
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