Lecture 101 Macroeconomic Analysis Financial Market and Expectations

Lecture 102 Contents Financial system and its importance in the Economy Determination of Instalment payments Growth of funds and their present values Fisher Equation: Real and nominal interest rates Bond market: Value of bonds and yield to maturity Arbitrage condition Stock market: value of stocks by the interest rate, risk premium and growth of dividends Investment decision problem Impact of changes in the interest rate in the price of assets

Lecture 103 Y= F(K,L) S C T Funds KFA Equity Treasury Bonds Deposit Banks Pension Funds Profit Link Between Financial System and the Economy

Lecture 104 Savers Households, Corporations and Government Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Investors Small, Medium and Large Private, Public, Domestic and Foreign Investors Small, Medium and Large Private, Public, Domestic and Foreign Major Players in a Financial Market CENTRALBANKCENTRALBANK CENTRALBANKCENTRALBANK GOVERNMENT&FSAGOVERNMENT&FSA GOVERNMENT&FSAGOVERNMENT&FSA CATS

Lecture 105 Financing an Investment Project Self Finance Bequests Bonds: Debt Finance Banks, Building Society, Insurance Equity Finance Stock Market (LSE) No Risk High Risk Maturity Instalment Method Repayment Method Financing of an Investment Project Demand for output Need for Capital

Lecture 106 Calculations of Instalments on a Loan: Lower Interest Rate Reduces the Interest Payment

Lecture 107 Numerical Example for the Instalment Calculations

Lecture 108 Calculation of Instalment Payment on at 8.9 APR at 12 Instalments (from the spreadsheet) D =20000 i = 8.9 APR

Lecture 109 Calculations of Instalments on a Loan for Multiple Years

Lecture 1010 Numerical Example for the Instalment Calculations

Lecture 1011 Calculation of Instalment Payment on at 8.9 APR for 5Years (from the spreadsheet) D =20000 i = 8.9 APR

Lecture 1012 Investment Questions How much will amount grow if you invest £100 today at 10 percent interest rate in 100 years time? What is the value of £100 that you will receive after 100 years if market interest rate is 10 percent? What is the yield to maturity of a bond with face value £1000 which sells in the market for 100 and matures in 10 years time? What is the yield to maturity if both face value and market prices are equal? What is the value of a Share that has a face value of 1000 and promised to pay dividend growing at 3 percent and has a risk factor about 2 percent?

Lecture 1013 More Investment Questions How do you finance a investment project? –Self finance –Bond Finance –Stock Market What determines value of a bond? What is the value of a stock that now pays £1000 as dividend and promises this to grow by 3 percent every year if the market interest rate is 5 percent and risk premium is 8 percent? How to make a decision to invest or not to invest?

Lecture 1014 How does 100 invested today grows at different interest in 100 years

Lecture 1015 Investors Care about the Real not the Nominal Interest Rate: Approximation Rule (Fisher Equation)

Lecture 1016 Expectation and the financial market: Fisher equation

Lecture 1017 Market Price of a console

Lecture 1018 Value of Bonds and Maturity

Lecture 1019 Higher Long Run Interest Rates are Better for Investment

Lecture 1020 What is the Present Value of a Console that pays £100 every year for 100 years at various discount factors (interest rates)

Lecture 1021 What is the Present Value of a Console that pays £100 every year and matures at a given year at Various interest rates

Lecture 1022 Bond Market and Bond Prices

Lecture 1023 Yield to maturity depends upon expected bond prices and interest rates

Lecture 1024 Yield to maturity (Return on a bond that matures at year t)

Lecture 1025 Government Borrowing (Million £) Source: Bank of England

Lecture 1026 Stock Market and Stock Prices

Lecture 1027 AIM

Lecture 1028

Lecture 1029

Lecture 1030

Lecture 1031 Value of a Stock: An example

Lecture 1032 Value of a Stock: An example

Lecture 1033 Company Market Capitalisation As At 31st December 2002 % Increase since 31st December 2001 Reckitt Benckiser8,49934% Gallaher Group4,01632% Liberty International Plc1,76532% SAB Miller4,75021% National Grid Transco14,11219% Associated British Foods4,64917% Imperial Tobacco Group5,49716% Scottish & Newcastle3,94416% Rexam1,84615% Kingfisher5,81312% Largest increases in equity market valuation - FTSE 100

Lecture 1034 Observations From the above Analysis of Stock Markets

Lecture 1035

Lecture 1036

Lecture 1037 A Question on Investment Decision

Lecture 1038 Investment Decision Analysis

Lecture 1039 Exercises Difference between real and nominal and short term and long term interest rates Instalment payments |Arbitrage conditions and Port-folio allocations in the financial markets Value of a console Market value of bonds and stocks Life time income Yield to maturity