Capital and interest. Discounting and investments...

Capital and interest. Discounting and investments

Capital and interest

The capital market is the sphere of demand and supply of financial resources used as investments. General and specific economic laws operate here. In particular, prices in these markets are set in accordance with the already known laws of supply and demand. At the same time, the derivative nature of the action of the laws of supply and demand in the borrowing markets for investment funds is multiplied, ie. raised, effect. This is due to the economic interests of participants in the capital markets, capitalized property and monetary funds, "servicing". investment processes, such as owners of cash savings; banks as intermediaries, providing these savings in the form of a loan (loan); investors attracting these funds to a particular real sector of the economy. In the price of real capital and the accompanying movement of monetary funds and stock assets (in the form of securities), not only the amount of income at the moment, but also its value in the more or less distant future, must be taken into account. In addition, in the price of all forms of capital attracted into the investment (real or monetary), certain adjustments, price adjustments for the uncertainty and risk inherent in any future period for which their attraction is calculated, use and return in increments in the form of real incomes should be taken into account.

The price of industrial, commercial and other types of real capital, capitalized money (savings), as well as securities of the stock market is the income that they are able to bring as a result of their application by business firms. A generalized expression of income on real capital or other types of capitalized property is the annual interest rate, ie. the amount of income that is calculated for a certain period of time, most often for the year, as a percentage of the amount of capital. The amount of income received is essentially a price of capital or property that can generate a constant annual income for a certain number of years. In particular, capitalized property in the form of a land plot, real estate, vehicle, etc., being leased to the entrepreneur, brings the owner a rental income, called annuity. A guaranteed, fixed income in the form of interest on bonds is also called an annuity. Another type of income on securities, such as shares of any business companies and firms, is dividend. This type of income may be higher than the interest rate on bonds or bank deposits, but its level and timing of payments are not guaranteed, as investments involve uncertainty and risk.

Cash saved on deposits in commercial banks brings interest to their owners. The same deposit savings used by commercial banks in the form of loans provided to investors (entrepreneurs) bring a percentage to the bank - margin. This form of income is a difference of interest: (a) received by a commercial bank from the provision of a loan and (b) savings deposits paid to the owners. As you can see, any form of capital, capitalized property, securities or accumulated funds brings a interest income, which differs in form from a particular type of capitalized wealth. The level of interest income can be established only in a competitive market environment, in accordance with the demand and supply for each type of capital property. The market adjusts these revenues through the mechanism of prices, supply and demand, having a decisive influence on the volume and direction of investment. The level of income is determined by market foam, which is established on all types of capital, capitalized property or monetary savings. The percentage as income on capital or any kind of capitalized property is determined by the productivity of the capital itself. If this profit is obtained through the attraction of other types of capital property or borrowed loan funds, then it is subject to further distribution in the form of payment of interest, dividends and other forms of income to their owners.

Discounting and investment

The productivity of real capital affects not only the level of profit (interest on capital), but also interest incomes for all types of capitalized property and monetary funds attracted by the investment mechanism. The calculation of revenues and prices for all types of attracted capital is usually called discounting. By discounting is usually understood the amount of net real capital productivity and the calculation of interest income for all types of capitalized property involved in the investment process, including for future periods. The most general form of the formula for discounting is:

where V- the current discounted value of capital, capitalized property; LH-permanent income in monetary terms, annually paid to the owner of capital, capitalized property during the period used, the number of years; I is the interest rate in decimal fractions (for example, at a 4% rate of 0.04, at a 5% rate of 0.05, at a 6% rate of 0.06, etc.) .

In economic practice, discounts are reduced to the calculation of discount favors, discount rates, total and net discounted incomes, including taking into account the time factor or the duration of investment projects. Discounting can be used to calculate the market price of the purchase and sale of capital (investment) or the amount of the annual income received from leasing it to the entrepreneur. For example, if the interest rate is 4%, then any type of capital or capitalized property that gives the right to a permanent income can be sold at a price 25 times higher than the annual income itself (1: 0.04 = 25). If the interest rate changes to 5%, then the price of the same capital will decrease, and it will be sold at a price 20 times higher than the annual income received from it (1: 0.05 = 20). At a rate of 2%, the market price of the sale of capital is 50 times higher than the annual income received from it (1: 0.02 = 50).

Discounting rule

The meaning of the formula for discounting is also to determine, for example, what amount of money should be converted into investments at a given interest rate (2%, 4%, 5%, etc.) in order to receive a certain constant annual income. Thus, the discount rule reads: in order to calculate how much the current income is in N monetary units, which will be paid through the & pound; years, the amount of money currently invested at the existing compound interest rate should be determined so that at the end of the calculation period in years the invested amount increases to the desired level of N monetary units. Accordingly, the calculation should be made using the formula

where d - the interest rate (for example, 0.02%, 0.04%, 0.05%, 0.08%, etc.) .

So, if from the investments in real capital (purchase of a tractor, lathe, crane, etc.) during t future years net annual income is expected to be Yv Yy Yg then their current price, or today's value PV (jrresent value), calculated by the formula

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