IR and Return and Cost of Funds (o bng phn trm )

Expense (do bang so)

-> Cost of funds -> WACC = wE. kE + [Link]
Loi suat rate of return -> dung cho 1 khoan dau tu
Lai suat interest rate -> dung cho cac khoan vay -> loai
return dac biet cho cac loai koan vay

Determinants of IR

Adopted from “Financial Markets and Institutions” – Saunders & Cornett

For TCHE401/TCH401E Classes in FTU only, no further distribution/reproduction allowed.
Interest rate:
The price of borrowing/lending
Income for one side, cost for another side
Nominal interest rates: the interest rates actually observed in
financial markets.
Used to determine fair present value and prices of securities.
Two components:
Opportunity cost.
Adjustments for individual security characteristics.

2-2
Additional purchasing power required to forego current
consumption.
What causes differences in nominal and real interest rates?
If you wish to earn a 3% real return and prices are expected to increase by
2%, what rate must you charge?
Irving Fisher first postulated that interest rates contain a premium for
expected inflation.
Fisher equation iR ≈ iN - π Equilirium - interest rates is not the price of the funds
(in
general) -> because funds can use for many
purposes.
Interest rates is the price of the funds for borrowing
and
lending.

2-3
Loanable funds theory explains interest rates and interest rate
movements The amount of funds that available to lending and borrowing
Views level of interest rates as resulting from factors that affect the
supply of and demand for loanable funds
Categorizes financial market participants – e.g., consumers,
businesses, governments, and foreign participants – as net
suppliers or demanders of funds

2-4
Access the long description slide. 2-5
1-6
 VN and US lending rates
18

16

14

12

10

0
1990 2000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
[YR1990] [YR2000] [YR2011] [YR2012] [YR2013] [YR2014] [YR2015] [YR2016] [YR2017] [YR2018] [YR2019] [YR2020]

Lending interest rate (%) [Link] Vietnam VNM

Lending interest rate (%) [Link] United States USA

Data from database: World Development Indicators

Last Updated: 07/30/2021

2-7
TABLE 2–1 Funds Supplied and Demanded by Various Groups (in trillions of dollars)

Net Funds Supplied

Funds Supplied Funds (Funds Supplied—
Demanded Funds Demanded)

Households $70.33 $14.51 $55.82

Business—nonfinancial 23.20 55.85 −32.65
Business—financial 85.91 96.90 −10.99
Government units 5.22 23.19 −17.97
Foreign participants 23.03 17.24 5.79

Source: Federal Reserve Board website, “Financial Accounts of the United States,” May 2016. [Link]

2-8
 Interest rates (+) and tax policy (-).
Income and wealth (+)
Attitudes about saving versus borrowing.
Credit availability (-)
Job security and belief in soundness of entitlements (-).
Hat nhan cua nen kinh te (hypothesized economy: nen kinh te ly thuyet Chinh phu Viet Nam gom cac bo, va cac co quan ngang bo: Ngan
hoa - loai bo cac thanh phan nho le chi de cac thanh phan chinh): hang trung uong Viet Nam. Vi vay, chinh phu VN co the yc NHTW
Households, Businesses, Foreign, Local government, Government. VN in tien. Nhung viec in tien co the dan den van de lam phat.
-> Vi vay, chinh phu phai di vay
Di vay de dau tu, khong phai vay cho tieu dung. - Cac khoan vay thuong 10 nam, 20 nam,...
Mot ngan sach can bang - Thu du bu cho chi va phai dam bao tich luy Duong cau cua government la 1 duong thang dung => elasticity do co
Chi > Thu -> Tang Thu, Giam Chi gian kh thay doi, IR tang hay giam kh anh huong den cau, cau kh thay
- Household di vay nhung khoan chi lon de phuc vu vao tieu dung doi, chinh phu se vay den khi nao du thi thoi. -> Khi gov vay qua
MQH giua luong cau va lai suat: lai suat cang cao, luong cau cang giam. nhieu _> crowding effect => anh huong den households va businesses.
(duong cau di xuong)
- Business di vay khi co loi cho doanh nghiep - du an su dung tien vay Households gui tien tk va chi vay khi day tu lon -> net surplus/ net
duoc chap nhan - NPV lenders
MQH giua luong cau va lai suat: lai suat cang cao, luong cau cang giam. Businesses kh thua tien -> net borrowers
(nhu cau di vay giam) (duong cau di xuong) Chinh phu: cho vay de lam chinh sach -> nhung khoan vay kh xay ra
- Government sinh ra de kiem soat, quan li, phan bo -> Government dung nhieu, quy mo kh lon -> net borrowers
tax lam cong cu de chi vao "dien duong truong tram", nguoi thu nhap cao Neu co them foreigners thi foreigners se switch back and forth giua
thi tax cao, tax dung de tai tro cac gia dinh kho khan. Ngan hang trung
uong thuc hien chinh sach tien te (dieu tiet bang tien te va lai suat), chinh 2-9
net borrower and net lenders, tuy thuoc vao quoc gia va thoi diem
Cau nhay cam hn cung: dem cai cua minh cho nguoi khac vay
phu thuc hien chinh sach tai khoa (dieu tiet bang cach thu va chi)
Relative interest rates and returns on global investments.
Expected exchange rate changes.
Safe haven status of U.S. investments.
Foreign central bank investments in the U.S.

2-10
Governments borrow heavily in the markets for loanable funds.
$23.19 trillion in 2016.
United States.
National debt was $19.21 trillion in 2016.
National debt (and interest payments on the national debt) have to be financed in
large part by additional borrowing.

2-11
2-12
Level of interest rates:
When the cost of loanable funds is high (i.e., interest rates are high),
businesses finance internally.
Expected future profitability vs. risk:
The greater the number of profitable projects available to businesses, the
greater the demand for loanable funds.
Expected economic growth. 1. Interest rate of government is expected to raise -> economic growth
-> GDP increase -> Product is the most important terminology ->
need to produce more to grow
M x V = P x Q = P*Y 2. Inflation
M: Cung tien 3. Money supply
M va (P*Q) co quan he thuan chieu voi nhau. 4. Government equalibrium
-> Viec tang cung tien se day nhanh su phat trien = Co 2 kieu tang truong trong kinh te hoc:
ve kinh te. - Techonology driven - so luong cong nhan vien kh thay doi -> tang
MS = M1 = MB * m truong khoi luong viec lam
m = (C + DD) / (C+R) = (c+1)/ (c+r) - tang truong so luong cong viec * viec lam -> tang truong khoi luong
-> MB la monetary base gom 2 thanh phan: tien viec lam
mat va du tru (reserve) = What happens to interest rates if we expect higher inflation?
De tang MS -> tang MB (in them tien) hoac m = Reflect to the higher inflation next year rather than this year - you
Khong the do luong duoc cung tien se anh huong have to take action now for the one next year - inflation this year have
the nao den lai suat-> MS tang/ giam - ko biet se already happened and it is too late to be reacted.
anh huong den lai suat ntn Inflation tang nhanh se lam cho lai suat tang nhanh vi (phai giai thich
theo loanable fund theory) 2-13
Figure 2–4 The Effect on Interest Rates from a Shift in the
Supply Curve of or Demand Curve for Loanable Funds
(a) Increase in the supply of loanable funds

Access the long description slide.

2-14
(b) Increase in the demand for loanable funds

Access the long description slide.

2-15
TABLE 2–2 Factors That Affect the Supply of and Demand for
Loanable Funds for a Financial Security

Panel A: The supply of funds

Factor Impact on Supply of Funds Impact on Equilibrium Interest

Rate*
Interest rate Movement along the supply curve Direct

Total wealth Shift supply curve Inverse

Risk of financial security Shift supply curve Direct

Near-term spending needs Shift supply curve Direct

Monetary expansion Shift supply curve Inverse

Economic conditions Shift supply curve Inverse

2-16
 Panel B: The demand for funds

Factor Impact on Demand for Funds Impact on Equilibrium Interest Rate

Interest rate Movement along the demand curve Direct

Utility derived from asset purchased Shift demand curve Direct

with borrowed funds
Restrictiveness of nonprice conditions Shift demand curve Inverse

Economic conditions Shift demand curve Direct

*A “direct” impact on equilibrium interest rates means that as the “factor” increases
(decreases) the equilibrium interest rate increases (decreases). An “inverse” impact means
that as the factor increases (decreases) the equilibrium interest rate decreases (increases).

2-17
 RFR - risk-free rate

Country declare default:

ij* = f(IP, RFR, DRPj, LRPj, SCPj, MPj) - All the debt will be fail, the lenders won't be able to get the
money back.
Austerity - Chinh sach tai khoa that lung buoc bung
- Tang thu toi da, gim chi ti thiu, gim các khon tr cp ti a d tr n
lãi vay.

Inflation (IP).
Quc gia v n, thì nh hng n các quc gia ã cho vay quc gia ó (ch n
s kh th nhn c tin ã cho vay)-> Pháp c ngun lc cho Hy Lp tránh

(𝐶𝑃𝐼𝑡+1 − 𝐶𝑃𝐼𝑡 )
IP = × 100
𝐶𝑃𝐼𝑡

Real risk-free interest rate (RFR) and the Fisher effect.

RFR = i − Expected (IP)

2-18
Default risk premium (DRP).
DRPj = ijt − iTt

ijt = interest rate on security issued by a non-Treasury issuer (issuer j) of maturity

m at time t
iTt = interest rate on security issued by the U.S. Treasury of maturity m at time t

Convertible bond - The holder will get more advantages: less risk,
more right to choose. Less benefit to interest, lower interest

Liquidity risk (LRP).

Special provisions (SCP).
Term to maturity (MP).

2-19
 Figure 2–6 Default Risk Premium on Corporate Bonds
Three credit rating agencies:
Moody, Standard and Poors,
Fitch
The rule for rating:
The closer with A, the better.
The more A, the better.

Source: Federal Reserve Board website, May 2016. [Link]

Access the long description slide.

2-20
 Yield curve - shows the interest rate
associated with different contract lengths for
a particular debt instrument. - 1 tài sn, 1 thi
im, nhiu lãi sut, nhiu thi hn.
(a) upward curve
(b) inverted/ downward sloping

(a) Upward sloping Which three-month bond and ten-year bond have higher
- Depend on the shape of yield curve
(b) Inverted or downward sloping Return = capital gain + dividend yield
(c) Flat

Access the long description slide.

2-21
Current long-term interest rates (1RN) are geometric averages of
current and expected future, E(Nr1), short-term interest rates.
Dieu kien de abitrage kh xay ra => (1+i02)^2 = (1+i01)(1+i12)
Geometric average la trung binh nhan: i02 la trung binh nhan cua i11 va i12 => khi co bin ng ln, trung binh nhan tuyet doi chinh
xac, trung bình cng có th gp sai s. => i02 la trung binh cua i01 va i12.
Lai suat dai bang trung binh cua cac loi suat ngan
1
1𝑅𝑁 = [(1+ 1R1 )(1 + 𝐸( 2𝑟1 )). . . (1 + 𝐸( 𝑁𝑟1 ))] 𝑁 −1
Dieu kien de abitrage kh xay ra: (1+i03)^3= (1+i01)(1+i12)(1+i23) = (1+i02)^2*(1+i03) = (1+i01)(1+i13)^2
=> (1+in)^n = (1+im)^m*(1+imn)^(n-m)
Neu lai suat duoc du kien se tang, thi duong cong lai suat se la upward sloping
Neu lai suat du kien se giam, thi dng cong lai suat se la downward sloping
Neu lai suat du kien se giu nguyen, thi duong cong lai suat se la flat.
1RN = actual N-period rate today
N = term to maturity, N = 1, 2, …, 4, …
1R1 = actual current one-year rate today
E(ir1) = expected one-year rates for years, i = 1 to N
Phat trien kinh te: lai suat di theo
i0n: lai suat sau t = n tu hom nay (co the xem tu bang cho vay)
-> Khong thay doi tuong lai vi la ki vong
Tai sao duong cong lai suat luon doc len, thanh cong trong viec giai thich tai sao lai suat dai han bang avg lai suat ngan han

2-22
 Li thuyet phan bu tinh thanh khoan

Long-term interest rates are geometric averages of current and

expected future short-term interest rates plus liquidity risk
premiums that increase with maturity.
Li thuyet giai thich duoc ca hai

1
1𝑅𝑁 = [(1 +1 𝑅1 )(1+𝐸(2 𝑟1 ) + 𝐿2 ). . . (1 + 𝐸( 𝑁𝑟1 )+) + 𝐿𝑁 )]𝑁 −1
(1+i02)^2 = (1+i01)(1+i12) + LP2

Lt = liquidity premium for period t

L2 < L3 < …LN

2-23
Figure 2–9 Yield Curve under the Unbiased Expectations
Theory (UET) versus the Liquidity Premium Theory (LPT)

Access the long description slide.

2-24
Individual investors and FIs have specific maturity preferences.
Interest rates are determined by distinct supply and demand
conditions within many maturity segments.
Investors and borrowers deviate from their preferred maturity
segment only when adequately compensated to do so.
Vi cac doanh nghiep toan chi tap trung vao 1 mang chinh (short term interest rates va long term interest rate
Li THUYET FAIL khi giai thich lai suat dai bang trung binh cac lai suat ngan ->
Li thuyet thanh cong trong viec giai thich duong cong lai suat luon upward sloping

2-25
A forward rate (f) is an expected rate on a short-term security that
is to be originated at some point in the future.
The one-year forward rate for any year, N years into the future is:

(1 +1 𝑅𝑁 )𝑁
𝑁𝑓1 = 𝑁−1 −1
(1 +1 𝑅𝑁−1 )

2-26
The time value of money is based on the notion that a dollar
received today is worth more than a dollar received at some future
date.
Simple interest: interest earned on an investment is not reinvested.
Compound interest: interest earned on an investment is reinvested, most
common.

2-27
Discount future payments using current interest rates to find the
present value (P V)

PV = FVt I(1 + r)t

P V = present value of cash flow

FVn = future value of cash flow (lump sum) received in t periods
r = interest rate earned per period on investment
t = number of compounding periods in investment horizon

2-28
The future value (F V) of a lump sum received at the beginning of
the investment horizon

FVt = PV(1 + r)t

2-29
Access the long description slide.
2-30
The present value of a finite series of equal cash flows received on
the last day of equal intervals throughout the investment horizon.

𝑡 𝑗
1
𝑃𝑉 = 𝑃𝑀𝑇 ෍
(1 + 𝑟)
𝑗=1

1
1− 𝑡
1+𝑟
𝑃𝑉 = 𝑃𝑀𝑇 ×
𝑟

PMT = periodic annuity payment

2-31
The future value of a series of equal cash flows received at equal
intervals throughout the investment horizon.

𝑡−1

𝐹𝑉𝑡 = 𝑃𝑀𝑇 ෍(1 + 𝑟)𝑗

𝑗=0

(1 + 𝑟)𝑡 − 1
𝐹𝑉𝑡 = 𝑃𝑀𝑇 ×
𝑟

2-32