Ch3Financial market and Net present value (NPV)(澳大利亚新英格兰大学公司金融课件)
Chapter 3-Financial Instruments, Markets, and Institutions(final)
Secondary Markets 二级市场
– Market where existing securities can be exchanged • New York Stock Exchange • American Stock Exchange • Over-the-counter (OTC) markets
3
Flow of Funds
• Financial system provides a transmission mechanism between saver-lenders and borrower-spenders. – Savers benefit – Investors benefit – Economy benefits
Financial Instruments and Markets (Cont.)
• The Money Market
– Exchange of short-term instruments—less than one year – Highly liquid, minimal risk – Use of a temporary surplus of funds by banks or businesses • U.S. Treasury bills 美国政府国库券 • Bank Certificates of Deposits 可转让定期存单 • Commercial paper 商业票据 • Federal funds 联邦基金
Financial Instruments and Markets (Cont.)
• Options and Futures Contracts
– Contractual agreement between two parties to exchange a third asset in the future at a stated price – Often called derivative financial instruments because they derive value from underlying assets – Gamble on price fluctuations and hope to profit – Eliminate the risk of price fluctuations
Financial markets and institution
Geography of the Markets
some markets for a particular market instrument may have a well defined geographic location such as the New York Stock Exchange or the Shanghai Stock Exchange
20
Dealing with Incentive Problems
A financial system provides ways to deal with the incentive problems that occur when one party to a financial transaction has information that the other party does not, or when one party is an agent and makes decisions for another
Investors need current prices to evaluate their portfolios of quoted securities
Quoted prices may be used to estimate the value of similar non-quoted securities
A Dutch household currently has excess funds needed in ten years
A Chinese business would become more profitable with new investment funds
Financial markets make this match
财务管理专业英语-Net Present Value and Other Investment Criteria
How much value is created from undertaking an investment?
– The first step is to estimate the expected future cash flows.
– The second step is to estimate the required return for projects of this risk level.
Since our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal.
5
2020/3/21
International financial managment
– The third step is to find the present value of the cash flows and subtract the initial investment.
4
2020/3/21
International financial managment
NPV Decision Rule
– Year 2: 101,880 – 70,800 = 31,080 still to recover – Year 3: 31,080 – 91,080 = -60,000 project pays
back in year 3
Do we accept or reject the project?
Does the NPV rule account for the risk of the cash flows?
Financial Markets and Net Present Value
3-3
McGraw-Hill/Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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McGraw-Hill/Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
• Because of this, a market has arisen for money. The price of money is the interest rate.
McGraw-Hill/Irwin
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
– Term intermediation
• Commercial banks finance long-term mortgages with short-term deposits.
– Risk intermediation
• Financial intermediaries can tailor the risk characteristics of securities for borrowers and lenders with different degrees of risk tolerance.
• When the quantity supplied equals the quantity demanded, the market is in equilibrium at the equilibrium price.
专业英语带解释的
Financial MarketsFinancial market金融市场: A financial market is a market in which people and entities can trade financial securities, commodities and other fungible items of value at low transaction costs and at prices that reflects supply and demand.International financial market国际金融市场: A financial market that involves participants all over the world.(查不到自己编的，请慎重考虑)Direct financing直接融资: An investor purchases the securities issued by ultimate borrowers (i.e. without intermediaries).Indirect financing间接融资: Indirect financing is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary.Money market货币市场: Money market is a component of financial market for assets involved in short-term borrowing, lending, buying and selling with ORIGINAL maturities of one year or less. Capital market资本市场: Capital market provides for the buying and selling of long-term(over 1 year) debts or equity-backed securities.Foreign exchange market (or currency market)外汇市场: Foreign exchange market deals with the exchanges of different means of payment.Primary market一级市场: A primary market is a market in which new issues of a security (like a bond or a stock), are sold to initial buyers by the corporation or government agency borrowing the funds.Secondary market二级市场: A secondary market is where is where the sale of previously issued securities takes place.Exchange market交易所市场: It is a highly organized market where tradable securities, commodities, foreign exchanges, futures and option contracts are sold and bought.OTC market柜台市场: over-the-counter market. A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor.Technical analysis技术分析: It is the art of deducing probable future trend from historical records of stock trading. (the study of the stock market itself rather than external factors) Fundamental analysis基本面分析或基础分析: It examines all relevant factors affecting the stock price in order to determine an intrinsic value for that stock.The top-down approach or Economy-Industry-Company(EIC) model自上而下法:1)select a country which could offer the investors better returns from other economies;2)select promising industries and companies in this country.The bottom-up or stock picking approach自下而上法: It is to find undervalued stocks regardless of the market and industry factors.Capital MarketBond债券: Bonds are securities that represent a debt owed by the issuer to the investor. They obligate the issuer to pay a specified amount at a given date.Government notes and bonds(Treasury bonds)国库券: They are issued to finance the national debt. Difference: notes have a original maturity of 1year to 10 years while bonds have a original maturity of 10-30 years. Note that they are free of default risk.Corporate bonds公司债券: Large corporations issue bonds in order to borrow funds for long periods of time. The bond indenture is a contract that states the lender’s rights and privileges andthe the borrower’s obligations.Stock股票: Shares of stock in the firm represent ownership.Outstanding stock流通股: The shares of a corporation’s stock that have been issued and are in the hands of the public.Mortgage loan抵押贷款: A mortgage loan is a loan secured by real property.Foreign Exchange MarketExchange rate汇率: The ratio of two different currencies.Bills of exchange票据: They are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is cited in the document.Demand draft即期汇票: It is a check created by a merchant with a buyer’s checking account number on it, but without the buyer’s original signature.Bankers draft银行汇票: It is a check where the funds are taken directly from financial institutions rather than the individual drawer’s account.Foreign bond外国债务: A bond issued in a domestic market by a foreign entity, in the domestic market’s currency.Dividend check股利支票: A share of profits in the form of checks received by a stockholder.（查不到自己编的，请慎重考虑）Pension check养老金支票: A sum of money in the form of checks paid regularly as a retirement benefit or by way of patronage.(查不到自己编的，请慎重考虑。
Financial Markets and Institutions 金融市场与结构 第三章
Yield Curve Shapes
Normal
Level or Flat
Inverted
Factors Affecting Security Yields
Special Provisions
Call Feature: enables borrower to buy back the bonds before maturity at a specified price
Factors Affecting Security Yields
Term to maturity
Interest rates typically vary by maturity. The term structure of interest rates defines the relationship between maturity and yield.
Forward
rate: market’s forecast of the future interest
rate
The Term Structure of Interest Rates
UpwardSloping Yield Curve
DownwardSloping Yield Curve
Factors Affecting Security Yields
The Liquidity of a security affects the yield/price of the security A liquid investment is easily converted to cash At minimum transactions cost Investors pay more (lower yield) for liquid investment Liquidity is associated with short-term, low default risk, marketable securities
Coursera Financial Market Essay耶鲁金融市场
Subprime Crisis has proved that the unilateral regulation mechanism of the financial market isn’t strong enough to regulate housing. With the double attributes, a house is not only a commodity but a fundamental and universal human right to live in dignity, raise a family and thrive.In the report of Leilani Farha, the financialization of housing leads the housing to be valued as a commodity rather than a human dwelling, which can become a speculative means to secure and accumulate wealth. However, Leilani Farha's report about the responses of the States and local governments to the financialization of housing exists some limitations. If the States, local governments, and relevant financial regulators impose taxes on vacant homes and luxury properties, it might be effective to crack down the financial speculations and subsidize a part of low-income households in the short term, but due to the demand elasticity of the speculative investors is bigger than the demand elasticity of the ordinary households, finally, the later pay the most taxes. Theoretically, the advanced financial market brings up diverse financial tools and products, improving the efficiency of resource allocation, reducing financial functions, and accelerating economic growth. While the development of the financialization of housing accumulates personal wealth and thrives the financial market, not everyone fairly gets benefits from the financial development. As asymmetric information can intensify the unfair allocation of resources between the wealthy and the poor, thesituation that the financing institutions generate abnormal profits and the ordinary undertake the risks become more common. The closer the sector and the center of money supply are, the more profits the sector can earn. So if the housing market becomes a capital-intensive place, there are some concerning points:1. It’s harder for the nation, states, and local governments to regulatethe real economy through the general regulatory mechanism because there is the sequence of the monetary transaction effect. The money supply floods onto the capital-intensive markets such as the financial and real estate markets first and then flows into service industries like the luxury market, ultimately comes the labor-intensive markets.Just like a pool with some grades, if the first grade is too large to get water down below, the real economy in the bottom can’t get enough liquidity support, the circulation of the financial system can’t continue.2. The financialization of housing will take the relevant risks whilehaving closer ties with the financial market, and the fluctuation of the housing market can influence the other high-quality markets.Also thanks to the asymmetric information, the speculative financial Titans can forecast the coming of the crises and mitigate the risks successfully but the ordinary investors and households can’t, so they become the payers of the debts. The question is, holding the currency,bonds, and stocks exchanged by mortgaging or selling the house in the housing market, there will be no turning back when trying to swap the shelters for the risky but promising future.The shelter is more scarce and expensive than other adequate human rights, such as food, water, and clothing. An estate is personal property, but it should be more cautious to transform estate from asset to capital. Different from the diversity of the above rights, the shelter can’t be supplemented in the short term if it’s financialized in the market. Therefore, the adequate human right to live in dignity and harmony can not be protected during the housing financialization period. There is some advice to relieve the negative impact:1. Strive to develop the real economy and basic industries. Recently,a growing number of governments position real estate as a pillarindustry of the national economy, focusing on its industrial investment function. Should such a trend continue, the strong association between real estate and the local economic development will result in the high dependency of the national economic growth and the local revenues on the real estate industry. Supporting the fundamental industries is a wise way for local governments to break this association.2. Encourage positive financial innovation to satisfy the variousinvestment requirement of residents. One of the reasons why the realestate market can be a speculative world is the estate is the perfect investment product affordable for some upper-middle-class investors, who have enough money and capability to enter into the high-capital-requirement real estate market. In the case where the rising trend of estate price remains unchanged, the policy to suppress speculative estate purchases can’t work. Therefore, providing diverse investment choices for more investors is better than simply solve the speculation problem in the financialization of housing.。
英文版 Finance Ch3
13
Real Investment Opportunities – Example 1
Consider an investment opportunity that costs $35,000 this year and provides a certain cash flow of $36,000 next year.
Is this a good opportunity?
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Real Investment Opportunities – Example 2
Thousands
$120 $100 $80 $60 $40 $20 $0 $0 $20 $40 $60 $80 $100 $120
Thousands
Consumption t+1
Consumption Today
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Real Investment Opportunities – Example 1
Should the individual take the real investment opportunity?
Thousands
$120 $100 $80 $60 $40 $20 $0 $0 $20 $40 $60 $80 $100 $120
Assume a market for borrowing or lending exists and the interest rate is 10%. This opens up a large set of consumption patterns across the two periods.
$120 $100 $80 $60 $40 $20 $0 $0 $20 $40 $60 $80 $100 $120
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Consider an investment that costs K in period 1 and returns R in period 2. If undertaken, the investment will move the initial endowment point.
y1 , y2 y1 K , y2 R
Financial Markets and Net Present Value (NPV)
Financial markets and NPV
Consumption choices over 2 periods Period 1, 2
Consumption Incomes Borrowing in period 1
c2
y2 y1 1 r
y2
y1
y1
y2 1 r
c1
• This test does not depend on individual preferences and investment and consumption saving decisions can be separated (the separation theorem)
Hence the investment is worthwhile if (***) > 0 , which implies
R 1 r K
Future value (FV) rule : Present va lue (PV) rule :
R 1 r K
R K 1 r R Net present va lue (NPV) rule : K 0 1 r
Chapter 4 Net present Value
extend NPV to multiple periods compounding and discounting
Chapter 5
How to value bonds and stocks
apply NPV to value bonds, stocks and other financial instruments
Examples :
An investor’s income is $100,000 this year and $120,000 next year. She plans to spend $80,000 this year and $143,200 next year. If the difference between her income and consumption patterns results from a financial market transaction, what is the market interest rate? (Saving this year) = $100,000 - $ 800,000 = $20,000 (Return on saving next year) = 20,000/(1+r) = 23,200 r = 0.16 An investment in real assets requires an initial outlay of $2 million. It promises to pay $2.18 million in one year. The market interest rate is 10%. Is this a good investment? No , since return from investing in financial market is 2(1+r) = 2(1.1) = 2.2 > 2.18 What is the rate of return on this project? r’ = (2.18 -2)/2 = 0.09 < 0.10
y2
y1
c1
First principle of investment decision making
An investment is worth taking if it is at least as desirable as what is already available in the financial markets • A new investment opportunity will be worthwhile if and only if it moves the initial endowment point outside the budget set
An increase in the interest rate r will imply that fewer investments will have a positive NPV. Hence, the demand for loans from firms is a downward sloping function of r. Equilibrium rate is determined by demand and supply of loans in capital market.
Inter-temporal consumption opportunities
: consumption smoothing possible due to financial markets
c2
y2 y1 1 r
Budget constraint
slope 1 r
If Balsam invests, what will be its value next year?
107,500(1+0.2) = 129,000 = 70,000(1.2) + 37,500(1.2) = 100,000(1.2) + 7,500(1.2)
max b
y2 1 r
y2
lending
y2 max c1 y1 b y1 1 r max c2 y2 y1 1 r
borrowing
y1
y2 y1 1 r
c1
Inter-temporal indifference curves
[Part II]
Chapter 3
Value and Capital Budgeting
Financial market and Net present value (NPV)
basic principles of rational decision making two period investment NPV introduced as investment decision making rule - first principle of investment decision making
c 1 ,c 2 y1 ,y 2
b
1. Inter-temporal consumption opportunities 2. Inter-temporal indifference curves 3. Effect of interest rate increases 4. First principle of investment decision-making 5. Net present value rule
Chapter 8 Strategy and analysis in using NPV
assess reliability of the estimates of NPV techniques dealing with uncertain incremental cash flows
Lecture 3
c2
Choice of patient individual
c2
Increasing utility
C
y2
D
Choice of impatient individual
y1
c1
c1
Effect of Interest rate increases
c2
C* C D D*
c1 becomes relatively more expensive. c1 will decline and saving will increase.
Chapter 6
Some alternative investment rules
Payback rule, Accounting rate of return, IRR
Chapter 7
NPV and capital budgeting
how to estimate cash flows required for capital budgeting incremental cash flows
borrowers are worse off lenders are better off Note ! Price-taking assumption used. [Conditions of perfectly competitive financial markets] – costless trading – information available – many insignificant traders
Budget constraint :
1 r c1 c2 1 r y1 y2 0 Substituting c1,c 2 y1-K,y 2 R to the budget constraint gives 1 r y1 K y2 R 1 r y1 y 2 (***)
A new firm has 0 initial endowment, so a positive NPV project appears as R