Tài chính doanh nghiệp - Chapter 5: History of interest rates and risk premiums

Chapter 5History of Interest Rates and Risk PremiumsFactors Influencing RatesSupplyHouseholdsDemandBusinessesGovernment’s Net Supply and/or DemandFederal Reserve ActionsQ0Q1r0r1FundsInterest RatesSupplyDemandInterest RatesSupplyQ0Q1r0r1FundsDemandLevel of Interest RatesFisher effect: Approximationnominal rate = real rate + inflation premiumR = r + i or r = R - iExample r = 3%, i = 6%R = 9% = 3% + 6% or 3% = 9% - 6%Fisher effect: Exact r = (R - i) / (1 + i) 2.83% = (9%-6%) / (1.06)Empirical Relationship: Inflation and interest rates move closely togetherReal vs. Nominal Rates HPR = Holding Period ReturnP0 = Beginning priceP1 = Ending priceD1 = Dividend during period oneRates of Return: Single PeriodEnding Price = 48Beginning Price = 40Dividend = 2HPR = (48 - 40 + 2 )/ (40) = 25%Rates of Return: Single Period Example1) Mean: most likely value2) Variance or standard deviation3) Skewness* If a distribution is approximately normal, the distribution is described by characteristics 1 and 2.Characteristics of Probability DistributionsSymmetric distributionmeans.d.s.d.Normal DistributionSubjective returnsp(s) = probability of a stater(s) = return if a state occurs1 to s statesMean Scenario or Subjective Returns State Prob. of State r in State 1 -.05 2 .2 .05 3 .4 .15 4 .2 .25 5 .1 .35E(r) = (.1)(-.05) + (.2)(.05)...+ (.1)(.35)E(r) = .15Scenario or Subjective Returns: ExampleStandard deviation = [variance]1/2Subjective or ScenarioVar =[(.1)(-.05-.15)2+(.2)(.05- .15)2...+ .1(.35-.15)2]Var= .01199S.D.= [ .01199] 1/2 = .1095Using Our Example:Variance or Dispersion of Returns Geom. Arith. Stan.Series Mean% Mean% Dev.%Sm Stk 11.6 17.7 39.3Lg Stk 10.0 12.0 20.6LT Gov 5.4 5.7 8.2T-Bills 3.8 3.8 3.2Inflation 3.1 3.1 4.4Annual Holding Period Returns (Arithmetic) Risk Real Series Premiums% Returns%Sm Stk 13.9 14.6Lg Stk 9.3 8.9LT Gov 1.9 2.6T-Bills --- 0.7Inflation --- ---Risk Premiums Real Returns