Time,andCapitalMarkets(微觀經濟學-華僑大學,Je2024/3/26Time,andCapitalMarkets(微觀經濟學華僑大學,JeTopicstobeDiscussedStocksVersusFlowsPresentDiscountedValueTheValueofaBondTheNetPresentValueCriterionforCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeTopicstobeDiscussedAdjustmentsforRiskInvestmentDecisionsbyConsumersIntertemporalProductionDecisions---DepletableResourcesHowareInterestRatesDetermined?Time,andCapitalMarkets(微觀經濟學華僑大學,JeIntroductionCapitalChoosinganinputthatwillcontributetooutputoveralongperiodoftimeComparingthefuturevaluetocurrentexpendituresTime,andCapitalMarkets(微觀經濟學華僑大學,JeStocksVersusFlowsStockCapitalisastockmeasurement.TheamountofcapitalacompanyownsTime,andCapitalMarkets(微觀經濟學華僑大學,JeStocksVersusFlowsFlowsVariableinputsandoutputsareflowmeasurements.AnamountpertimeperiodTime,andCapitalMarkets(微觀經濟學華僑大學,JePresentDiscountedValue(PDV)DeterminingthevaluetodayofafutureflowofincomeThevalueofafuturepaymentmustbediscountedforthetimeperiodandinterestratethatcouldbeearned.Time,andCapitalMarkets(微觀經濟學華僑大學,JePresentDiscountedValue(PDV)FutureValue(FV)Time,andCapitalMarkets(微觀經濟學華僑大學,JePresentDiscountedValue(PDV)QuestionWhatimpactdoesRhaveonthePDV?Time,andCapitalMarkets(微觀經濟學華僑大學,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(微觀經濟學華僑大學,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(微觀經濟學華僑大學,JePresentDiscountedValue(PDV)ValuingPaymentStreamsChoosingapaymentstreamdependsupontheinterestrate.Time,andCapitalMarkets(微觀經濟學華僑大學,JeTwoPaymentStreamsPaymentStreamA: $100 $100 0PaymentStreamB:

$20 $100 $100Today 1Year 2YearsTime,andCapitalMarkets(微觀經濟學華僑大學,JeTwoPaymentStreams

Time,andCapitalMarkets(微觀經濟學華僑大學,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(微觀經濟學華僑大學,JeTheValueofLostEarningsPDVcanbeusedtodeterminethevalueoflostincomefromadisabilityordeath.Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofLostEarningsScenarioHaroldJenningsdiedinanautoaccidentJanuary1,1986at53yearsofage.Salary:$85,000RetirementAge:60Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofLostEarningsQuestionWhatisthePDVofJennings’lostincometohisfamily?Mustadjustsalaryforpredictedincrease(g)Assumean8%averageincreaseinsalaryforthepast10yearsTime,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofLostEarningsQuestionWhatisthePDVofJennings’lostincometohisfamily?Mustadjustforthetrueprobabilityofdeath(m)fromothercausesDerivedfrommortalitytablesTime,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofLostEarningsQuestionWhatisthePDVofJennings’lostincometohisfamily?AssumeR=9%Rateongovernmentbondsin1983Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofLostEarnings

Time,andCapitalMarkets(微觀經濟學華僑大學,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(微觀經濟學華僑大學,JeTheValueofLostEarningsFindingPDVThesummationofcolumn4willgivethePDVoflostwages($650,252)Jennings’familycouldrecoverthisamountascompensationforhisdeath.Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofaBondDeterminingthePriceofaBondCouponPayments=$100/yr.for10yrs.PrincipalPayment=$1,000in10yrs.Time,andCapitalMarkets(微觀經濟學華僑大學,JePresentValueof

theCashFlowfromaBondInterestRatePDVofCashFlow($thousands)00.050.100.150.200.51.01.52.0Whydoesthevaluedeclineastherateincreases?Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheValueofaBondPerpetuitiesPerpetuitiesarebondsthatpayoutafixedamountofmoneyeachyear,forever.Time,andCapitalMarkets(微觀經濟學華僑大學,JeEffectiveYieldonaBondCalculatingtheRateofReturnFromaBondTime,andCapitalMarkets(微觀經濟學華僑大學,JeEffectiveYieldonaBondCalculatingtheRateofReturnFromaBondTime,andCapitalMarkets(微觀經濟學華僑大學,JeEffectiveYieldonaBondInterestRate00.050.100.150.200.51.01.52.0PDVofPayments(ValueofBond)($thousands)Whydoyieldsdifferamongdifferentbonds?Theeffectiveyieldistheinterestratethatequatesthepresentvalueofabond’spaymentstreamwiththebond’smarketprice.Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheYieldsonCorporateBondsInordertocalculatecorporatebondyields,thefacevalueofthebondandtheamountofthecouponpaymentmustbeknown.AssumeIBMandPolaroidbothissuebondswithafacevalueof$100andmakecouponpaymentseverysixmonths.Time,andCapitalMarkets(微觀經濟學華僑大學,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(微觀經濟學華僑大學,JeTheYieldsonCorporateBondsTheIBMbondyield:Assumeannualpayments2009-1999=10yearsTime,andCapitalMarkets(微觀經濟學華僑大學,JeTheYieldsonCorporateBondsThePolaroidbondyield:WhywasPolaroidR*greater?Time,andCapitalMarkets(微觀經濟學華僑大學,JeTheNetPresentValueCriterion

forCapitalInvestmentDecisionsInordertodecidewhetheraparticularcapitalinvestmentisworthwhileafirmshouldcomparethepresentvalue(PV)ofthecashflowsfromtheinvestmenttothecostoftheinvestment.Time,andCapitalMarkets(微觀經濟學華僑大學,JeNPVCriterionFirmsshouldinvestifthePVexceedsthecostoftheinvestment.TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,Je

TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeTheElectricMotorFactory(choosingtobuilda$10millionfactory)8,000motors/monthfor20yrsCost=$42.50eachPrice=$52.50Profit=$10/motoror$80,000/monthFactorylifeis20yearswithascrapvalueof$1millionShouldthecompanyinvest?TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeAssumeallinformationiscertain(norisk)R=governmentbondrateTheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeNetPresentValueofaFactoryInterestRate,R00.050.100.150.20-6NetPresentValue($millions)-4-20246810TheNPVofafactoryisthepresentdiscountedvalueofallthecashflowsinvolvedinbuildingandoperatingit.R*=7.5Time,andCapitalMarkets(微觀經濟學華僑大學,JeRealversusNominalDiscountRatesAdjustingfortheimpactofinflationAssumeprice,cost,andprofitsareinrealtermsInflation=5%TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,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(微觀經濟學華僑大學,JeRealversusNominalDiscountRatesRealR=nominalR-inflation=9-5=4TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeNetPresentValueofaFactoryInterestRate,R00.050.100.150.20-6NetPresentValue($millions)-4-20246810IfR=4%,theNPVispositive.Thecompanyshouldinvestinthenewfactory.Time,andCapitalMarkets(微觀經濟學華僑大學,JeNegativeFutureCashFlowsInvestmentshouldbeadjustedforconstructiontimeandlosses.TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeElectricMotorFactoryConstructiontimeis1year$5millionexpendituretoday$5millionexpenditurenextyearExpectedtolose$1millionthefirstyearand$0.5millionthesecondyearProfitis$0.96million/yr.untilyear20Scrapvalueis$1millionTheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,Je

TheNetPresentValueCriterion

forCapitalInvestmentDecisionsTime,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskDeterminingthediscountrateforanuncertainenvironment:Thiscanbedonebyincreasingthediscountratebyaddingarisk-premiumtotherisk-freerate.Ownersareriskaverse,thusriskyfuturecashflowsareworthlessthanthosethatarecertain.Time,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskDiversifiableVersusNondiversifiableRiskDiversifiableriskcanbeeliminatedbyinvestinginmanyprojectsorbyholdingthestocksofmanycompanies.Nondiversifiableriskcannotbeeliminatedandshouldbeenteredintotheriskpremium.Time,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskMeasuringtheNondiversifiableRiskUsingtheCapitalAssetPricingModel(CAPM)Supposeyouinvestintheentirestockmarket(mutualfund)rm=expectedreturnofthestockmarketrf=riskfreeraterm-rf=riskpremiumfornondiversifiableriskTime,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskMeasuringtheNondiversifiableRiskUsingtheCapitalAssetPricingModel(CAPM)CalculatingRiskPremiumforOneStockTime,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskQuestionWhatistherelationshipbetweenthenondiversifiableriskandthevalueoftheassetbeta?Time,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskGivenbeta,wecandeterminethecorrectdiscountratetouseincomputinganasset’snetpresentvalue:Time,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskDeterminingbetaStockEstimatedstatisticallyforeachcompanyTime,andCapitalMarkets(微觀經濟學華僑大學,JeAdjustmentsforRiskDeterminingbetaFactoryWeightedaverageofexpectedreturnonthecompany’sstockandtheinterestonthedebtExpectedreturndependsonbetaCaution:TheinvestmentshouldbetypicalforthecompanyTime,andCapitalMarkets(微觀經濟學華僑大學,JeInvestmentDecisionsbyConsumersConsumersfacesimilarinvestmentdecisionswhentheypurchaseadurablegood.ComparefuturebenefitswiththecurrentpurchasecostTime,andCapitalMarkets(微觀經濟學華僑大學,JeBenefitsandCostofBuyingaCarS=valueoftransportationservicesindollarsE=totaloperatingcost/yrPriceofcaris$20,000Resalevalueofcaris$4,000in6yearsInvestmentDecisionsbyConsumersTime,andCapitalMarkets(微觀經濟學華僑大學,JeBenefitsandCostInvestmentDecisionsbyConsumersTime,andCapitalMarkets(微觀經濟學華僑大學,JeChoosinganAirConditionerBuyinganewairconditionerinvolvesmakingatrade-off.AirConditionerALowpriceandlessefficient(highoperatingcost)Time,andCapitalMarkets(微觀經濟學華僑大學,JeChoosinganAirConditionerBuyinganewairconditionerinvolvesmakingatrade-off.AirConditionerBHighpriceandmoreefficientBothhavethesamecoolingpowerAssumean8yearlifeTime,andCapitalMarkets(微觀經濟學華僑大學,JeChoosinganAirConditioner

Time,andCapitalMarkets(微觀經濟學華僑大學,JeChoosinganAirConditionerShouldyouchooseAorB?DependsonthediscountrateIfyouborrow,thediscountratewouldbehighProbablychoosealessexpensiveandinefficientunitIfyouhaveplentifulcash,thediscountratewouldbelow.ProbablychoosethemoreexpensiveunitTime,andCapitalMarkets(微觀經濟學華僑大學,JeIntertemporalProduction

Decisions---DepletableResourcesFirms’productiondecisionsoftenhaveintertemporalaspects---productiontodayaffectssalesorcostsinthefuture.Time,andCapitalMarkets(微觀經濟學華僑大學,JeScenarioYouaregivenanoilwellcontaining1000barrelsofoil.MCandAC=$10/barrelShouldyouproducetheoilorsaveit?IntertemporalProduction

Decisions---DepletableResourcesTime,andCapitalMarkets(微觀經濟學華僑大學,JeScenarioPt=priceofoilthisyearPt+1=priceofoilnextyearC=extractioncostsR=interestrate

IntertemporalProduction

Decisions---DepletableResourcesTime,andCapitalMarkets(微觀經濟學華僑大學,JeDonotproduceifyouexpectitspricelessitsextractioncosttorisefasterthantherateofinterest.Extractandsellallofitifyouexpectpricelesscosttoriseatlessthantherateofinterest.Whatwillhappentothepriceofoil?IntertemporalProduction

Decisions---DepletableResourcesTime,andCapitalMarkets(微觀經濟學華僑大學,JePriceofanExhaustibleResourceTimePriceQuantityPriceccMarginalExtractionCostTPTP0P-cP0DemandTime,andCapitalMarkets(微觀經濟學華僑大學,JeInacompetitivemarket,Price-MCmustriseatexactlytherateofinterest.Why?Howwouldproducersreactif:P-CincreasesfasterthanR?P-CincreasesslowerthanR?PriceofanExhaustibleResourceTime,andCapitalMarkets(微觀經濟學華僑大學,JeNoticeP>MCIsthisacontradictiontothecompetitiverulethatP=MC?Hint:

Whathappenstotheopportunitycostofproducinganexhaustibleresource?PriceofanExhaustibleResourceTime,andCapitalMarkets(微觀經濟學華僑大學,JeP=MCMC=extractioncost+usercostUsercost=P-marginalextractioncostPriceofanExhaustibleResourceTime,andCapitalMarkets(微觀經濟學華僑大學,JeHowwouldamonopolistchoosetheirrateofproduction?Theywillproducesothatmarginalrevenuerevenuelessmarginalcostrisesatexactlytherateofinterest,or(MRt+1-c)=(1+R)(MRt-c)PriceofanExhaustibleResourceTime,andCapitalMarkets(微觀經濟學華僑大學,JeThemonopolistismoreconservationistthanacompetitiveindustry.Theystartoutchargingahigherpriceanddepletetheresourcesmoreslowly.PriceofanExhaustibleResourceResourceProductionbyaMonopolistTime,andCapitalMarkets(微觀經濟學華僑大學,JeHowDepletableAre

DepletableResources?Crudeoil .4to.5Naturalgas .4to.5Uranium .1to.2Copper .2to.3Bauxite .05to.2Nickel .1to.2IronOre .1to.2Gold .05to.1Resource UserCost/CompetitivePriceTime,andCapitalMarkets(微觀經濟學華僑大學,JeThemarketstructureandchangesinmarketdemandhavehadaverydramaticimpactonresourcepricesoverthepastfewdecades.QuestionWhywouldoilandnaturalgashavesuchahighusercostratiocomparedtotheotherresources?HowDepletableAre

DepletableResources?Time,andCapitalMarkets(微觀經濟學華僑大學,JeHowAreInterestRatesDetermined?Theinterestrateisthepricethatborrowerspaylenderstousetheirfunds.Determinedbysupplyanddemandforloanablefunds.Time,andCapitalMarkets(微觀經濟學華僑大學,JeSHouseholdssupplyfundstoconsumemoreinthefuture;thehighertheinterestrate,themoretheysupply.SupplyandDemandforLoanableFundsQuantityofLoanableFundsRInterestRateDTR*Q*DT=DH+DFandequilibriuminterestrateisR*.DHDFDHandDF,thequantitydemandedforloanablefundsbyhouseholds(H)andfirms,respectively,variesinverselywiththeinterestrate.Time,andCapitalMarkets(微觀經濟學華僑大學,JeChangesInTheEquilibriumSDTR*Q*Duringarecessioninterestratesfallduetoadecreaseinthedemandforloanablefunds.D’TQ1R1QuantityofLoanableFundsRInterestRateTime,andCapitalMarkets(微觀經濟學華僑大學,JeChangesInTheEquilibriumSDTR*Q*Whenthefederalgovernmentrunslargebudgetdeficitsthedemandforloanablefundsincrease.Q2R2D’TQuantityofLoanable