Time-andCapitalMarkets微观经济学华侨大学-Je

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