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

1、Chapter 15,Investment, Time and Capital Markets,Chapter 15,2,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,Chapter 15,3,Topics to be Discussed,Investment Decisions by Consu

2、mers Investments in Human Capital Intertemporal Production Decisions Depletable Resources How Are Interest Rates Determined?,Chapter 15,4,Introduction,Markets for factors and output give a reasonably complete picture Capital markets are different Capital is durable It is an input that will contribut

3、e to output over a long period of time Must compare the future value to current expenditures,Chapter 15,5,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 need

4、ed or used per time period,Chapter 15,6,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

5、today?,Chapter 15,7,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,Chapter 15,8,Present Discount

6、ed Value (PDV),Future Value (FV) One dollar invested today should yield(1 + R) dollars a year from now (1 + R) is the future value of the dollar today What is the value today of getting $1 a year from now? What is the present discounted value of the $1?,Chapter 15,9,Present Discounted Value (PDV),Ch

7、apter 15,10,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,Chapter 15,11,PDV of $1 Paid in the Future,Chapter 15,12,

8、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,Chapter 15,13,Two Payment Streams,Payment Stream A: $100 $1000 Payment Stream B:$20 $100 $1

9、00,Today1 Year2 Years,Chapter 15,14,Two Payment Streams,Chapter 15,15,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 = .05R = .10R = .15R = .20,Notice that which stream is worth more depends on the interest rate At lower interest rates

10、, B pays out more As interest rates increase, A ends up paying out more,Chapter 15,16,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 Retir

11、ement Age: 60,Chapter 15,17,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

12、probability of death (m) from other causes Derived from mortality tables,Chapter 15,18,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,Chapter 15,19,The Value of Lost Earnings,Chap

13、ter 15,20,Calculating Lost Wages,Chapter 15,21,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,Chapter 15,22,The Value of a Bond,A bond is a contract in which a b

14、orrower 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,Chapter 15,23,The Value of a B

15、ond,Determining the Price of a Bond Coupon Payments = $100/yr. for 10 yrs. Principal Payment = $1,000 in 10 yrs.,Chapter 15,24,Present Value of the Cash Flow from a Bond,The higher the interest rate, the lower the value of the bond,Chapter 15,25,The Value of a Bond,Perpetuity is a bond that pays out

16、 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,Chapter 15,26,The Effective Yield on a Bond,Corporate and government bonds are often traded on the bond market The price

17、 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,Chapter 15,27,Effective Yield on a Bond,Calculating the Rate of Return from a Bond

18、P is value of perpetuity market price Can use equations to find value of R given P and the payment,Chapter 15,28,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,C

19、hapter 15,29,Effective Yield on a Bond,Calculating the Rate of Return from a Bond See graph showing how R depends on P,Chapter 15,30,Effective Yield on a Bond,The effective yield is the interest rate that equates the present value of a bonds payment stream with the bonds market price.,Notice the Bon

20、d Price is inverse to the effective yield,Chapter 15,31,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 corpora

21、tions are more stable than others,Chapter 15,32,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 si

22、x months,Chapter 15,33,Yields on Corporate Bonds,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 previ

23、ous day (down 0.38),Chapter 15,34,The Yields on Corporate Bonds,The IBM bond yield: Assume annual payments and 10 years to maturity,Chapter 15,35,The Yields on Corporate Bonds,The Lucent bond matures in 5 years and has a yield of:,Chapter 15,36,The Yields on Corporate Bonds,In 2003, Lucent had signi

24、ficant 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,Chapter 15,37,The Net Present Value Criterionfor Capital Investment Decisions,Firms have to decide when and how much capital

25、 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,Chapter 15,38,The Net Present Value Criterionfor Capital Investment Decisions,NPV Criterion Firms should invest if the pre

26、sent value of the expected future cash flows from an investment exceeds the cost of the investment,Chapter 15,39,The Net Present Value Criterionfor Capital Investment Decisions,Chapter 15,40,The Net Present Value Criterionfor Capital Investment Decisions,Determining the Discount Rate The firm must d

27、etermine 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,Chapter 15,41,The Net Present Va

28、lue 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 i

29、nvest?,Chapter 15,42,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,Chapter 15,43,Net Present Value of a Factory,Interest Rate, R,

30、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,Chapter 15,44,The Net Present Value Criterionfor Capital Investment Decisions,When determining whether to invest or not,

31、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%,Chapter 15,45,Real Versus Nominal Discount Rates,Assume price, cost, and profits are in real terms Therefore, P =

32、(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,Chapter 15,46,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,

33、so must include inflation here if doing it elsewhere Real R = nominal R - inflation = 9% - 5% = 4%,Chapter 15,47,Net Present Value of a Factory,If R = 4%, the NPV is positive. The company should invest in the new factory.,Chapter 15,48,The Net Present Value Criterionfor Capital Investment Decisions,

34、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,Chapter 15,49,The Net Present Value Criterionfor Capital Investment Decisions,Electric Motor Fact

35、ory 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,Chapter 15,50,The Net Present Value Criterionfor Capital Inves

36、tment Decisions,Chapter 15,51,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,Chapter 15,52,D

37、iversifiable 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,Chapter 15,53,Diversifiable vs. Nondiversifiable Risk,Diversifyi

38、ng 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,Chapter 15,54,Diversifiable vs. Nondiversifiable Risk,Some

39、 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,Chapter 15,55,Diversifia

40、ble 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 no

41、ndiversifiable risk since stocks tend to move with economy Expected return on stock is higher than risk free investment,Chapter 15,56,Capital Asset Pricing Model,Suppose you invest in the entire stock market (mutual fund) rm = expected return of the stock market rf = risk free rate rm - rf = risk pr

42、emium for nondiversifiable risk Additional expected return you get for bearing the nondiversifiable risk of the stock market,Chapter 15,57,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 premiu

43、m,Chapter 15,58,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

44、 means beta is 1 The larger the beta, the greater the expected return on the asset,Chapter 15,59,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,Chapter 15

45、,60,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

46、 level of nondiversifiable risk,Chapter 15,61,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,Chapter 15,62,Investment Decisions by Consumers,Benefits and Costs of Buying a

47、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,Chapter 15,63,Benefits and Costs of Buying a Car,S = doll

48、ar 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,Chapter 15,64,Investment Decisions by Consumers,B

49、enefits and Cost,Chapter 15,65,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 inte

50、rest rate, often better to buy,Chapter 15,66,Choosing an Air Conditioner,When buying an air conditioner, must typically face a tradeoff between efficiency and cost Efficiency how much energy used to cool Do you want to pay more now for lower long run costs or do you want to pay less now for higher l

51、ong run costs?,Chapter 15,67,Choosing an Air Conditioner,Buying a new air conditioner involves making a trade-off Air Conditioner B High price and more efficient Both have the same cooling power Assume an 8 year life,Chapter 15,68,Choosing an Air Conditioner,Chapter 15,69,Choosing an Air Conditioner

52、,Should you choose A or B? Depends on the discount rate If you borrow, the discount rate would be high Probably choose a less expensive and inefficient unit If you have plentiful cash, the discount rate would be low Probably choose the more expensive unit,Chapter 15,70,Investments in Human Capital,I

53、ndividuals make choices on whether to invest in human capital Do I finish college? Do I go to graduate school? Human capital is the knowledge, skills, and experience that make an individual more productive and thereby able to earn a higher income over a lifetime,Chapter 15,71,Investments in Human Ca

54、pital,Typically the investment in human capital pays off in the future in terms of higher pay, better promotions, and/or more job opportunities How does one decide to invest in human capital? Can use the net present value rule from before,Chapter 15,72,Investments in Human Capital,Suppose you are de

55、ciding to go to college for 4 years or skip college and go to work Assume purely financial basis (ignore pleasure or pain from college) Calculate net present value of costs and benefits of going to college,Chapter 15,73,Investments in Human Capital,Major costs for college Opportunity cost of lost wa

56、ges approximately $20,000 per year Costs for tuition, room and board, and related expenses assume $20,000 per year Total economic costs of attending college are $40,000 per year for 4 years,Chapter 15,74,Investments in Human Capital,Benefits of college Higher salary throughout working life On averag

57、e, college grad earns $20,000 higher than high school grad Assume that persists for 20 years Can now calculate net present value of investing in a college education,Chapter 15,75,Investments in Human Capital,Chapter 15,76,Investments in Human Capital,What discount rate should be used? We are ignorin

58、g inflation, so you should use a real discount rate About 5% would reflect opportunity cost of money for many households Return of investing in other assets This gives an NPV of about $66,000; therefore, investing in college is a good idea,Chapter 15,77,Investments in Human Capital,Although NPV is p

59、ositive, it is not very large Almost free entry system to attend college Free entry markets tend to lead to zero economic profits,Chapter 15,78,Should You Go to Business School?,Getting an MBA often means a large increase in salary Can see the typical change in salary from getting an MBA from top business schools For US as a whole, average salary pre-MBA is about $45,000 and obtaining the MBA increases salary by about $30,000,Chapter 15,79,Should You Go to Business School?,Chapter 15,80,Should You Go to Business School?,Chapter 15,81,Should You Go to Business School?,Assuming the $30