Lecture2_AssetPrices

# Lecture2_AssetPrices - ECON 3024 Managerial Macroeconomics...

This preview shows pages 1–9. Sign up to view the full content.

ECON 3024 Managerial Macroeconomics Expectations and Asset Prices

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Financial Markets Markets that trade financial assets such as equities, bonds, currencies and derivatives Supplier: commercial banks and investment banks Demander: anyone who has wealth Prices: asset prices How to compute asset prices? 2
The expected present discounted value of a sequence of future payments is: the value today of this expected sequence of payments. Expected Present Discounted Values 3 The word “present” comes from the fact that we are looking at the value of a payment next year in terms of dollars today . The word “discounted” comes from the fact that the value next year is discounted 1/(1 + i t ) is the discount factor . The 1-year nominal interest rate, i t , is the discount rate .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
(a) One dollar this year is worth 1+ i t dollars next year. (b) If you borrow 1/(1+i t ) dollars this year, you will repay 1 dollar next year. So the present discounted value of a dollar next year is equal to 1/(1+i t ) (c) One dollar is worth dollars two years from now. (d) The present discounted value of a dollar two years from today is equal to: Computing Expected Present Discounted Values Expected Present Discounted Values 4 ( ) ( ) 1 1 1 i i t t 1 1 1 1 ( ) ( ) i i t t
The present discounted value of a sequence of payments, or value in today’s dollars equals: When future payments or interest rates are uncertain, then: Present discounted value, or present value are another way of saying “expected present discounted value.” Computing Expected Present Discounted Values The General Formula Expected Present Discounted Values 5 \$ \$ ( ) \$ ( ) ( ) \$ V z i z i i z t t t t t t t    1 1 1 1 1 1 1 2 \$ \$ ( ) \$ ( ) ( ) \$ V z i z i i z t t t e t t e t e t    1 1 1 1 1 1 1 2

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This formula has these implications: Present value depends positively on today’s actual payment and expected future payments. Present value depends negatively on current and expected future interest rates. Using Present Values: Examples Expected Present Discounted Values 6
The terms in the expression in brackets represent a geometric series. Computing the sum of the series, we get: Using Present Values: Examples Constant Interest Rates and Payments Expected Present Discounted Values 7 Assume that interest rates are expected to be constant over time, i ; and when the sequence of payments is equal—called them \$ z , the present value formula simplifies to: \$ \$ [ / ( ) ] [ / ( ) ] V z i i t n 1 1 1 1 1 1 \$ \$ ( ) ( ) V z i i t n     1 1 1 1 1 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Assuming that payments start next year and go on forever, Using the property of geometric sums, the present value is: Which simplifies to: Using Present Values: Examples Constant Interest Rates and Payments, Forever Expected Present Discounted Values 8 \$ ( ) \$ ( ) \$ ( ) ( ) \$ V i z i z i i z t        1 1 1 1 1 1 1 1 1 2 1 1 \$ \$ (1 )1 (1/(1 )) t V z i i \$ \$ V z i t
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern