2010 premium ppt macroprinc-ch27-

1、27C H A P T E RThe Basic Tools of FinanceEcP RoI N nC I PoL E mSO FicsN. Gregory MankiwPremium PowerPoint Slides by Ron Cronovich 2010 South-Western, a part of Cengage Learning, all rights reserved2010updateIn this chapter,look for the answers to these questions:What is “present value”?How can we us

2、e it tocompare sums of money from different times?Why are people risk averse?How can risk-averse people use insurance and diversification to manage risk?What determines the value of an asset? What is the “efficient markets hypothesis”? Why is beating the market nearly impossible?1IntroductionThe fin

3、ancial system coordinates saving and investment.Participants in the financial system make decisions regarding the allocation of resources over time and the handling of risk.Finance is the field that studies such decision making.2THE BASIC TOOLS OF FINANCEPresent Value:The Time Value of MoneyTo compa

4、re a sums from different times, we usethe concept of present value.The present value of a future sum:the amountthat would be needed today to yield that future sum at prevailing interest ratesRelated concept:The future value of a sum:the amount the sumwill be worth at a given future date, when allowe

5、dto earn interest at the prevailing rate3THE BASIC TOOLS OF FINANCEEXAMPLE 1:A Simple DepositDeposit $100 in the bank at 5% interest. What is the future value (FV) of this amount?In N years, FV = $100(1 + 0.05)NIn three years, FV = $100(1 + 0.05)3 = $115.76 In two years, FV = $100(1 + 0.05)2 = $110.

6、25 In one year, FV = $100(1 + 0.05) = $105.004THE BASIC TOOLS OF FINANCEEXAMPLE 1:A Simple DepositDeposit $100 in the bank at 5% interest. What is the future value (FV) of this amount?In N years, FV = $100(1 + 0.05)NIn this example, $100 is the present value (PV).In general,where r denotes the inter

7、est rate (in decimal form).Solve for PV to get:5THE BASIC TOOLS OF FINANCEPV = FV/(1 + r )NFV = PV(1 + r )NEXAMPLE 2:Investment DecisionPresent value formula:PV = FV/(1 + r )NSuppose r = 0.06.Should General Motors spend $100 million to build a factory that will yield $200 million in ten years?Soluti

8、on:Find present value of $200 million in 10 years: PV = ($200 million)/(1.06)10 = $112 millionSince PV cost of factory, GM should build it.6THE BASIC TOOLS OF FINANCEEXAMPLE 2:Investment DecisionInstead, suppose r = 0.09.Should General Motors spend $100 million to build a factory that will yield $20

9、0 million in ten years?Solution:Find present value of $200 million in 10 years: PV = ($200 million)/(1.09)10 = $84 millionSince PV price of lot.Yes, buy it.B. Should you buy it ifr = 0.10?PV = $100,000/(1.1)5 = $62,090.PV of lot value, the stock is overvalued. If price value, the stock is undervalue

10、d. If price = value, the stock is fairly valued.26THE BASIC TOOLS OF FINANCEL E A R N I N G3A C T I V E Valuing a share of stockIf you buy a share of AT&T stock today, you will be able to sell it in 3 years for $30. you will receive a $1 dividend at the end of each of those 3 years.If the prevailing

11、 interest rate is 10%,what is the value of a share of AT&T stock today?27L E A R N I N G3A C T I V E AnswersThe value of a share of AT&T stock equals the sum of the numbers in the last column:$25.0328amount you will receivewhen you will receive itpresent value of the amount$1in 1 year$1/(1.1)=$.91$1

12、in 2 years$1/(1.1)2=$.83$1in 3 years$1/(1.1)3=$.75$30in 3 years$30/(1.1)3=$22.54Asset ValuationValue of a share= PV of any dividends the stock will pay+ PV of the price you get when you sell the shareProblem:When you buy the share, you dontknow what future dividends or prices will be.One way to valu

13、e a stock:fundamental analysis,the study of a companys accounting statementsand future prospects to determine its value29THE BASIC TOOLS OF FINANCEL E A R N I N G4A C T I V E Show-of-hands surveyYou have a brokerage account with Merrill Lynch. Your broker calls you with a hot tip about a stock: new

14、information suggests that the company will be highly profitable.Should you buy stock in the company?A. YesB. NoC. Not until you read the prospectus.D. Whats a prospectus?30The Efficient Markets HypothesisEfficient Markets Hypothesis (EMH): the theory that each asset price reflects allpublicly availa

15、ble information about the value ofthe asset31THE BASIC TOOLS OF FINANCEImplications of EMHStock market is informationally efficient:Each stock price reflects all available information about the value of the company.Stock prices follow a random walk:A stock price only changes in response to new infor

16、mation (“news”) about the companys value. News cannot be predicted, so stock price movements should be impossible to predict.It is impossible to systematically beat the market. By the time the news reaches you, mutual fund managers will have already acted on it.2THE BASIC TOOLS OF FINANCEInde

17、x Funds vs. Managed FundsAn index fund is a mutual fund that buys all the stocks in a given stock index.An actively managed mutual fund aims to buy only the best stocks.Actively managed funds have higher expenses than index funds.EMH implies that returns on actively managedfunds should not consisten

18、tly exceed the returns on index funds.33THE BASIC TOOLS OF FINANCEIndex Funds vs. Managed Funds34THE BASIC TOOLS OF FINANCE2001-2006annualized return2006expense ratioS&P 500 (index fund) Managed large cap funds6.2%5.9.3511.020S&P MidCap 400 (index fund) Managed mid cap funds351.458S&P Small

19、Cap 600 (index fund) Managed mid cap funds12.510.3.5501.272Market IrrationalityMany believe that stock price movements are partly psychological: J.M. Keynes:stock prices driven by “animalspirits,” “waves of pessimism and optimism” Alan Greenspan:1990s stock market boom dueto “irrational exuberance”B

20、ubbles occur when speculators buy overvalued assets expecting prices to rise further.The importance of departures from rational pricing is not known.35THE BASIC TOOLS OF FINANCECONCLUSIONThis chapter has introduced some of the basic tools people use when they make financial decisions.The efficient m

21、arkets hypothesis teaches that a stock price should reflect the companys expected future profitability.Fluctuations in the stock market have important macroeconomic implications, which we will study later in this course.36THE BASIC TOOLS OF FINANCECHAPTER SUMMARYThe present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce that future sum.Because of diminishing marginal utility of wealth,most people are risk-av