英文版 Finance Ch3.ppt

Financial Markets and Net Present ValueLecture Outline Introduction Perfect markets and arbitrage Two-period model Real investment opportunities Corporate investment decision making The separation Theorem Summary and conclusions I. Introduction – Financial Markets Individuals may desire to consume amounts different from their incomes. Financial markets facilitate this. The interest rate is the price of money in borrowing or lending transactions. Introduction – Financial Markets The job of balancing the supply of and demand for loanable funds is taken by the money market. When the quantity supplied equals the quantity demanded, the market is in equilibrium at the equilibrium price. II. Perfect Markets and Arbitrage For simplicity, consider a perfect market where Trading is costless. Information about borrowing and lending is freely available to all participants. Everyone is a price taker: many competitive traders; no one can move market prices. The result is that only one equilibrium interest rate will exist otherwise arbitrage opportunities would arise. Under such assumptions, the one interest rate would apply to both borrowing and lending transactions. Arbitrage Defined Arbitrage – the ability to earn a risk-free profit from a zero net investment. III. Two-period model Consider a simple model where an individual lives for 2 periods, has an income endowment, and has preferences about when to consume. Endowment (or given income) is $40,000 now and $60,000 next year Two-period model: no market Intertemporal Consumption Opportunity Set Intertemporal Consumption Opportunity Set What is the maximum possible consumption in t+1 and how is this achieved? What is the maximum possible consumption today and how is this achieved? What is the slope of the consumption opportunity set? Intertemporal Consumption Opportunity Set Notes on calculations Present value of a cash flow received in one time period Future value in one time period of a cash flow received today