Chapter 27
The Basic Tools of Finance
• Finance is the field that studies how people
make decisions regarding the allocation of
resources over time and the handling of risk.
27.1 PRESENT VALUE: MEASURING
THE TIME VALUE OF MONEY
• Present value refers to the amount of money
today that would be needed to produce,
using prevailing interest rates, a given
future amount of money.
27.1 PRESENT VALUE: MEASURING
THE TIME VALUE OF MONEY
• The concept of present value demonstrates the
following:
• Receiving a given sum of money in the present is
preferred to receiving the same sum in the future.
• In order to compare values at different points in
time, compare their present values.
• Firms undertake investment projects if the present
value of the project exceeds the cost.
27.1 PRESENT VALUE: MEASURING
THE TIME VALUE OF MONEY
• If r is the interest rate, then an amount X to
be received in N years has present value of:
X/(1 + r)N
27.1 PRESENT VALUE: MEASURING
THE TIME VALUE OF MONEY
• Future Value
– The amount of money in the future that
an amount of money today will yield,
given prevailing interest rates, is called
the future value.
FYI: Rule of 70
• According to the rule of 70, if some variable
grows at a rate of x percent per year, then that
variable doubles in approximately 70/x years.
27.2 MANAGING RISK
• A person is said to be risk averse if she
exhibits a dislike of uncertainty.
27.2 MANAGING RISK
• Individuals can reduce risk choosing any of
the following:
– Buy insurance
– Diversify
– Accept a lower return on their
investments
Figure 1 Risk Aversion
Utility
Utility gain
from winning
$1,000
Utility loss
from losing
$1,000
0
$1,000
loss
Current
wealth
Wealth
$1,000
gain
27.2.2 The Markets for Insurance
• One way to deal with risk is to buy
insurance.
• The general feature of insurance contracts is
that a person facing a risk pays a fee to an
insurance company, which in return agrees
to accept all or part of the risk.
27.2.3 Diversification of Idiosyncratic Risk
• Diversification refers to the reduction of
risk achieved by replacing a single risk with
a large number of smaller unrelated risks.
27.2.3 Diversification of Idiosyncratic Risk
• Idiosyncratic risk is the risk that affects
only a single person. The uncertainty
associated with specific companies.
27.2.3 Diversification of Idiosyncratic Risk
• Aggregate risk is the risk that affects all
economic actors at once, the uncertainty
associated with the entire economy.
• Diversification cannot remove aggregate
risk.
Figure 2 Diversification
Risk (standard
deviation of
portfolio return)
(More risk)
49
Idiosyncratic
risk
20
Aggregate
risk
(Less risk)
0
1 4 6 8 10
20
30
40
Number of
Stocks in
Portfolio
27.2.3 Diversification of Idiosyncratic Risk
• People can reduce risk by accepting a lower
rate of return.
Figure 3 The Tradeoff between Risk and Return
Return
(percent
per year)
8.3
75%
stocks
25%
stocks
100%
stocks
50%
stocks
No
stocks
3.1
0
5
10
15
20
Risk
(standard
deviation)
27.3 ASSET VALUATION
• 27.3.1 Fundamental analysis is the study
of a company’s accounting statements and
future prospects to determine its value.
27.3 ASSET VALUATION
• People can employ fundamental analysis to
try to determine if a stock is undervalued,
overvalued, or fairly valued.
• The goal is to buy undervalued stock.
27.3.2 Efficient Markets Hypothesis
• The efficient markets hypothesis is the
theory that asset prices reflect all publicly
available information about the value of an
asset.
27.3.2 Efficient Markets Hypothesis
• A market is informationally efficient when
it reflects all available information in a
rational way.
• If markets are efficient, the only thing an
investor can do is buy a diversified portfolio
CASE STUDY: Random Walks and
Index Funds
• Random walk refers to the path of a
variable whose changes are impossible to
predict.
• If markets are efficient, all stocks are fairly
valued and no stock is more likely to
appreciate than another. Thus stock prices
follow a random walk.
FIGURE 27-4 RELATIONSHIP OF CANADIAN STOCK PRICES
TO THEIR PAST VALUES
23
Source: DRI/McGraw-Hill Macroeconomic Database
Log of Shanghai stock Price index(1990.12-2008.4)
FIGURE 1. RELATIONSHIP OF Shanghai
STOCK PRICES TO THEIR PAST VALUES
9
LnP t 1  0.2772 0.9627LnP t
t  2.866
t 70.25
AdjR 2  0.9597, D.W.  2.08
8
7
6
5
4
4
5
6
7
8
9
Log of Shanghia stock price index lagged 1 month
Figure2. ShangHai stock closed-price-per-month index(1990.12--2008.4)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
92
94
96
98
00
02
04
06
Figure3. Log of ShangHai Stock Price Month-closed index(1990.12--2008.4)
9
8
7
6
5
4
92
94
96
98
00
02
04
06
FIGURE 27-5 RELATIONSHIP OF S&P 500 INDEX TO PAST
VALUES
LnP t 1  0.0014  1.001  LnP t
27
Source: Haver Analytics Macroeconomic Database
调整后税率
调整时间
1990.6.28
1990.11.23
1991.10.10
1992.6.12
1997.5.12
1998.6.12
1999.6.1
2001.11.6
2005.1.23
2007.5.30
2008.4.24
调整当天情况
沪市
沪市
深市
开盘
6‰
3‰
3‰
3‰
190.71
3‰
3‰
1164.11
5‰
5‰
1490.78
4‰
4‰
1373.11
3‰(B股) 3‰(B股) 1283.3
2‰
2‰
1678.17
1‰
1‰
1258.02
3‰
3‰
4087.41
1‰
1‰
3539.87
收盘
191.01
1171.71
1500.4
1383.39
1311.59
1671.28
1255.78
4053.09
3633.83
涨跌幅
↑1%
↓0.56%
↑2.26%
↑2.65%
↑2.52%
↓0.49%
↑1.73%
↓6.50%
↑9.29%
深市
开盘
717.04
2369.58
5991.89
4047.06
3277.55
3390.47
3114.3
12651.2
12787.38
收盘
641.41
2389.57
6026.88
4056.52
3377.71
3373.87
3111.4
12627.15
12914.76
涨跌幅
↓10.02%
↑0.94%
↑2.76%
↑2.52%
↑3.28%
↓0.15%
↑1.82%
↓6.61%
↑9.59%
海外证券税收体系一览
美国
日本
香港
一、流转税，包括印花税、证券交易税。近年来，因为证券税收中的印花税
、证券交易税其收入占全部税收的比重小，同时注重资本的流动性，所以现
已取消此税。
二、收益税，对个人证券投资所得的征税，将其所得并入普通所得，征收个
人所得税;对公司证券投资所得的征税，将其并入公司所得，征收公司所得
税。对个人投资所得和公司投资所得分开征税，则存在重复征税的现象。
三、资本利得税。资本利得并入普通利得征税。对长期资本利得和短期资本
利得，采取差别税率，最高达28%。资本损失区分个人和公司，采取两种办
法。对个人资本损失可允许扣除，并规定短期资本损失先扣除，长期资本损
失后扣除，但每年的扣除额不得超过3000美元，当年没有扣完的，可结转以
后年度继续扣除。
四、遗产和赠与税。
一、流转税：包括印花税、证券登记许可税、证券交易税、证券交易所税。
二、收益税：对个人单独设立资本收益税，但可允许个人选择申报;法人资
本收益并入普通所得征税，不单独征税。
三、资本利得税，对个人单独设资本利得税;而法人并入普通所得征税，不
单设资本利得税，但资本利得税只对法人和个人居民征收;四、遗产和赠与
税。
一、流转税，主要是印花税。对股票等证券的交易，按成交金额向买卖双方
征收印花税。
二、收益税，对证券的股息、债息等资本收益，征收利息税。
三、资本利得税。对资本增值不征税，但如果投资者在短期内频繁炒作而获
利，其所得可被税务局裁定为经营性所得，并入其他所得计征薪俸税。
四、遗产和赠与税。
上海证券家数
深圳证券家数
957
781
截止：2008年4月18日
 中国住房贷款的两种还款方式的计算：
1、等额本息贷款计算公式：
每月还款金额(简称每月本息)
贷款本金  月利率  1  月利率 
还款月数

1  月利率
还款月数
1
.
2.　等额本金贷款计算公式：
每月还款金额(简称每月本息)
 贷款本金 

  本金  已归还本金累计额   月利率.
 还款月数 
Summary
• Because savings can earn interest, a sum of
money today is more valuable than the same sum
of money in the future.
• A person can compare sums from different times
using the concept of present value.
• The present value of any future sum is the
amount that would be needed today, given
prevailing interest rates, to produce the future
sum.
Summary
• Because of diminishing marginal utility, most
people are risk averse.
• Risk-averse people can reduce risk using
insurance, through diversification, and by
choosing a portfolio with lower risk and lower
returns.
• The value of an asset, such as a share of stock,
equals the present value of the cash flows the
owner of the share will receive, including the
stream of dividends and the final sale price.
Summary
• According to the efficient markets hypothesis,
financial markets process available information
rationally, so a stock price always equals the best
estimate of the value of the underlying business.
• Some economists question the efficient markets
hypothesis, however, and believe that irrational
psychological factors also influence asset prices.
Questions for reviews
1. present value, future value?
2. Risk averse?
3. The efficient markets hypothesis?
4. Random walk? ( Random walk means that the changes
in stock prices are impossible to predict from available
information.)
5. Market irrationality? (Assets markets are driven by
the “animal spirits”本能冲动 of investors—irrational
waves of optimism and pessimism.)
1.利率为7%。用现值的概念比较10年中得到的200美元与20
年中得到的300美元。
答：
present value　of $200　to　be　received　in10
years：
P10 
200
1  7%
10
200

 101.67
1.96715
present value　of $300　to　be　received　in　20 years;
P20 
300
1  7%
20
300

 77.53
3.86968
Obviously , P10  P20 .
2.人们从保险市场中得到了什么利益？阻碍保险公
司完全发生作用的两个问题是什么？
3.什么是多元化？股东从1～10种股票中多元化还
是从l00～l20种股票中多元化？
4.比较股票和政府债券，哪一种风险更大？哪一种
能够带来更高的平均收益？
5.股票分析师在确定一股股票的价值时应该考虑哪
些因素？
6.叙述有效市场假说，并给出一个与这种理论一致
的证据。
7.解释那些怀疑有效市场假说的经济学家的观点。