平狄克微观经济学Investment-Time-and--Capital-Markets.ppt

,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Chapter 15,*,2005 Pearson Education,Inc.,Chapter 15,Investment,Time and Capital Markets,Topics to be Discussed,Stocks Versus Flows,Present Discounted Value,The Value of a Bond,The Net Present Value Criterion for Capital Investment Decisions,Adjustments for Risk,2,Chapter 15,Topics to be Discussed,Investment Decisions by Consumers,Investments in Human Capital,Intertemporal Production Decisions Depletable Resources,How Are Interest Rates Determined?,3,Chapter 15,Introduction,Markets for factors and output give a reasonably complete picture,Capital markets are different,Capital is durable,It is an input that will contribute to output over a long period of time,Must compare the future value to current expenditures,4,Chapter 15,Stocks Versus Flows,Stock,Capital is a stock measurement,The amount of plant and equipment a company owns at a point in time,Flow,Variable inputs and outputs are flow measurements,An amount needed or used per time period,5,Chapter 15,Stocks Versus Flows,Profit is also a flow number,Must know what the capital stock will allow the firm to earn a flow of profit,Was the investment a sound decision?,Must be able to value,today,the expected profit flow over time,What is the flow of profit worth today?,6,Chapter 15,Present Discounted Value(PDV),Determining the value today of a future flow of income,The value of a future payment must be discounted for the time period and interest rate that could be earned,Interest rate rate at which one can borrow or lend money,7,Chapter 15,Present Discounted Value(PDV),The interest rate impacts the PDV,The lower the interest rate,the less you money you needed invest to reach your future goal,We can see how different interest rates will give different future values,10,Chapter 15,PDV of$1 Paid in the Future,R,1 YR,5 YR,10 YR,30 YR,1%,$0.990,$0.951,$0.905,$0.742,2%,$0.980,$0.906,$0.820,$0.552,5%,$0.952,$0.784,$0.614,$0.231,10%,$0.909,$0.621,$0.386,$0.057,11,Chapter 15,Valuing Payment Streams,Can determine a stream of payments over time,Choosing a payment stream depends upon the interest rate,Given two streams,we can compute and add the present values of each years payment,12,Chapter 15,Two Payment Streams,Payment Stream A:$100$1000,Payment Stream B:$20$100$100,Today1 Year2 Years,13,Chapter 15,Two Payment Streams,14,Chapter 15,PDV of Payment Streams,PDV of Stream,A,:$195.24$190.90$186.96$183.33,PDV of Stream,B:,205.94193.54182.57172.78,R,=.05,R=,.10,R=,.15,R=,.20,Notice that which stream is worth more depends on the interest rate,At lower interest rates,B pays out more,As interest rates increase,A ends up paying out more,15,Chapter 15,The Value of Lost Earnings,PDV can be used to determine the value of lost income from a disability or death,Scenario,Harold Jennings died in an auto accident January 1,1986 at 53 years of age,Salary:$85,000,Retirement Age:60,16,Chapter 15,The Value of Lost Earnings,What is the PDV of Jennings lost income to his family?,Must adjust salary for predicted increase(g),Assume an 8%average increase in salary for the past 10 years,Average rate of growth of airline pilot salary over time,Must adjust for the true probability of death(m)from other causes,Derived from mortality tables,17,Chapter 15,The Value of Lost Earnings,Must adjust for the true probability of death(m)from other causes,Derived from mortality tables,Assume R=9%,The rate on government bonds,18,Chapter 15,The Value of Lost Earnings,19,Chapter 15,Calculating Lost Wages,20,Chapter 15,The Value of Lost Earnings,Finding PDV,The summation of column 4 will give the PDV of lost wages$650,252,Jennings family could recover this amount as partial compensation for his death,21,Chapter 15,The Value of a Bond,A,bond,is a contract in which a borrower agrees to pay the bondholder(the lender)a stream of money,Example:A bond issued by a company may make a“coupon”payment of$100 per year for the next 10 years and a final payment of$1000,How much would you pay for this bond?,Present value of payment stream,22,Chapter 15,The Value of a Bond,Determining the Price of a Bond,Coupon Payments=$100/yr.for 10 yrs.,Principal Payment=$1,000 in 10 yrs.,23,Chapter 15,Present Value of the Cash Flow from a Bond,Interest Rate,0.05,0.10,0.15,0.20,PDV of Cash Flow,($thousands),0,0.5,1.0,1.5,2.0,The higher the interest rate,the lower the value of the bond,24,Chapter 15,The Value of a Bond,Perpetuity is a bond that pays out a fixed amount of money each year forever,Present value of a perpetuity is an infinite summation,Can express the value of a perpetuity by,PDV=$100/R,In general,PDV=payment/R,25,Chapter 15,The Effective Yield on a Bond,Corporate and government bonds are often traded on the bond market,The price of the bond can be determined by looking at the market price,The value placed on it by buyers and sellers,To compare the bond with other investment options,can determine the interest rate consistent with that value,26,Chapter 15,Effective Yield on a Bond,Calculating the Rate of Return from a Bond,P is value of perpetuity market price,Can use equations to find value of R given P and the payment,27,Chapter 15,Effective Yield on a Bond,From previous example,R=$100/$1000=0.10=10%,The interest rate calculated here is the,effective yield,Rate of return one receives by investing in the bond,28,Chapter 15,Effective Yield on a Bond,Calculating the Rate of Return from a Bond,See graph showing how,R,depends on,P,29,Chapter 15,Effective Yield on a Bond,Interest Rate,0.05,0.10,0.15,0.20,0,0.5,1.0,1.5,2.0,PDV of Payments(Value of Bond),($thousands),The effective yield is the interest,rate that equates the present,value of a bonds payment,stream with the bonds market price.,Notice the Bond Price is inverse to the effective yield,30,Chapter 15,Effective Yield on a Bond,Yields vary on different bonds,Ex:Corporate bonds yield more than government bonds,The degree of risk a bond holds is reflected in the yield,Riskier bonds have higher yields,Government unlikely to default,Some corporations are more stable than others,31,Chapter 15,The Yields on Corporate Bonds,In order to calculate corporate bond yields,the face value of the bond and the amount of the coupon payment must be known,Assume:,IBM and Lucent both issue bonds with a face value of$100 and make coupon payments every six months,32,Chapter 15,Yields on Corporate Bonds,Closing prices for IBM on March 5,2003,7 13,6.2,10,120.25,-.38,Closing prices for Lucent on March 5,2003,5 08,7.5,129,73.50,-.38,Wall Street Journal,3/6,7.5:,coupon payments for one year($7.5),13:,maturity date of bond(2013),6.2:,annual coupon/closing price($7.5/120.25),10:,number of bonds traded that day(10),120.25:,closing price($120.25),-.38:,change in price from previous day(down 0.38),33,Chapter 15,The Yields on Corporate Bonds,The IBM bond yield:,Assume annual payments and 10 years to maturity,34,Chapter 15,The Yields on Corporate Bonds,The Lucent bond matures in 5 years and has a yield of:,35,Chapter 15,The Yields on Corporate Bonds,In 2003,Lucent had significant decline in revenue,laid off many workers and had an uncertain future,The more risky financial situation required a higher yield on the bonds to entice investors to buy,36,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,Firms have to decide when and how much capital to invest in,Comparing the present value(PV)of the cash flows from the investment to the cost of the investment can give firms information needed to make worthwhile decisions,37,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,NPV Criterion,Firms should invest if the present value of the expected future cash flows from an investment exceeds the cost of the investment,38,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,39,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,Determining the Discount Rate,The firm must determine the opportunity cost of its money,The correct value of the discount rate should equal the rate that the firm could earn on a,similar,investment,One with same risk,We assume no risk for now,so opportunity cost is what the firm could earn on a government bond,40,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,The Electric Motor Factory(choosing to build a$10 million factory),8,000 motors/month for 20 yrs,Cost=$42.50 each,Price=$52.50/motor,Profit=$10/motor or$80,000/month,Factory life is 20 years with a scrap value of$1 million,Should the company invest?,41,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,Assume all information is certain(no risk),R=government bond rate,Discount rates below 7.5,NPV is positive,Discount rates above 7.5,NPV is negative,42,Chapter 15,Net Present Value of a Factory,Interest Rate,R,0,0.05,0.10,0.15,0.20,-6,Net Present Value,($millions),-4,-2,0,2,4,6,8,10,Firm should not invest for discount rates below 7.5,Firm should not invest for discount rates above 7.5,R*=7.5,43,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,When determining whether to invest or not,must distinguish between real and nominal rates,Real versus Nominal Discount Rates,Adjusting for the impact of inflation,Assume price,cost,and profits are in real terms,Inflation=5%,44,Chapter 15,Real Versus Nominal Discount Rates,Assume price,cost,and profits are in real terms,Therefore,P=(1.05)(52.50)=55.13,Year 2,P=(1.05)(55.13)=57.88,C=(1.05)(42.50)=44.63,Year 2,C=.,Profit remains$960,000/year,45,Chapter 15,Real Versus Nominal Discount Rates,If the cash flows are in real terms,then the discount rate must be in real terms as well,Opportunity cost of the investment,so must include inflation here if doing it elsewhere,Real R=nominal R-inflation=9%-5%=4%,46,Chapter 15,Net Present Value of a Factory,Interest Rate,R,0.10,0.15,0.20,0,-6,Net Present Value,($millions),-4,-2,0,2,4,6,8,10,0.04*,If,R,=4%,the NPV is,positive.The company,should invest in,the new factory.,47,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,Negative Future Cash Flows,Companies expect losses in certain situations,Take time to build demand,High up front costs that lower over time,Investment should be adjusted for construction time and losses,48,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,Electric Motor Factory,Construction time is 1 year,$5 million expenditure today,$5 million expenditure next year,Expected loss is$1 million the first year and$0.5 million the second year,Profit is$0.96 million/yr.until year 20,Scrap value is$1 million,49,Chapter 15,The Net Present Value Criterionfor Capital Investment Decisions,50,Chapter 15,Adjustments for Risk,Determining the discount rate for an uncertain environment:,This can be done by increasing the discount rate by adding a,risk-premium,to the risk-free rate,Amount of money that a risk-averse individual will pay to avoid taking a risk,51,Chapter 15,Diversifiable vs.Nondiversifiable Risk,Diversifiable risk,can be eliminated by investing in many projects or by holding the stocks of many companies,Nondiversifiable risk,cannot be eliminated and should be entered into the risk premium,52,Chapter 15,Diversifiable vs.Nondiversifiable Risk,Diversifying spreads risk over many options,Invest in many types of investments diversify portfolio,Firms invest in many different projects,No reward for assets that have only diversifiable risk tend to earn return close to risk free return on average,53,Chapter 15,Diversifiable vs.Nondiversifiable Risk,Some risk cannot be eliminated or avoided,Company profits depend on the economy boom or recession,Future economic growth is uncertain so cannot eliminate all risk,Investors should be rewarded for bearing this risk,Opportunity cost of investing is higher must include risk premium,54,Chapter 15,Diversifiable vs.Nondiversifiable Risk,The Capital Asset Pricing Model(CAPM),Model in which the risk premium for a capital investment depends on the correlation of the investments return with the return on the entire stock market,If you invest in a mutual fund,there is no diversifiable risk but there is nondiversifiable risk since stocks tend to move with economy,Expected return on stock is higher than risk free investment,55,Chapter 15,Capital Asset Pricing Model,Suppose you invest in the entire stock market(mutual fund),r,m,=expected return of the stock market,r,f,=risk free rate,r,m,-r,f,=risk premium for nondiversifiable risk,Additional expected return you get for bearing the nondiversifiable risk of the stock market,56,Chapter 15,Capital Asset Pricing Model,Return on some assets is correlated with stock market as a whole,CAPM summary of relationship between expected return and risk premium,57,Chapter 15,Adjustments for Risk,The asset beta,measures the sensitivity of an assets return to market movements and,therefore,the assets nondiversifiable risk,1%rise in market resulting in a 2%rise in asset price means the beta is 2,1%rise in market resulting in a 1%rise in asset price means beta is 1,The larger the beta,the greater the expected return on the asset,58,Chapter 15,Adjustments for Risk,Given beta,we can determine the correct discount rate to use in computing an assets net present value:,Risk-free rate plus a risk premium to reflect nondiversifiable risk,59,Chapter 15,Determining Beta,For a stock,beta determined statistically,For a factory,determining beta is more difficult,Firms often use the,company cost of capital,as nominal discount rate,Weighted average of the expected return on a companys stock and the interest rate that it pays for debt,Can depend on level of nondiversifiable risk,60,Chapter 15,Investment Decisions by Consumers,Consumers face similar investment decisions when they purchase a durable good,Compare flow of future benefits with the current purchase cost,61,Chapter 15,Investment Decisions by Consumers,Benefits and Costs of Buying a Car,If you keep the car for 5 or 6 years,you have benefits that occur in the future,Must compare the future flow of net benefits from owning the car(having transportation minus cost of insurance,maintenance and gas)with the purchase price,62,Chapter 15,Benefits and Costs of Buying a Car,S=dollar value of transportation services in dollars to a consumer,E=total operating cost/yr,Insurance,Maintenance,and Gas,Price of car is$20,000,Resale value of car is$4,000 in 6 years,Decision to buy the car can be framed in net present value terms,63,Chapter 15,Investment Decisions by Consumers,Benefits and Cost,64,Chapter 15,Investment Decisions by Consumers,Whether you should buy the car or not depends on the discount rate,If you have to borrow money,then use interest loan rate,When comparing to buy or lease,you can use same calculation,High interest rate,often better to lease,Low interest rate,often better to buy,65,Chapter 15,Choosing an Air Conditioner,When buying an air