Interest Rates, Capital Markets & the Capital Asset Pricing Model
This week’s material focuses on capital budgeting, i.e. the investment decisions of firms. The textbook described the process for choosing projects by estimating cash flows and applying the appropriate investment decision rule.
Our discussion this week will provide an opportunity for us to ‘think and dream big’ in a capital budgeting sense. Your task will be as follows:
1. Go to either of the following websites: or fora.tv. Both of these sites provide video presentations on a variety of topics, some of which deal with new innovations and ideas. Watch some of the videos that deal with new ideas/innovations and choose one that resonates with you.
2. Describe the idea for your classmates and provide a link to it. Try to capture the idea presented in the video in a capital budgeting framework. Try to identify the various costs of a project, the cash flows associated with it, etc. That is, if you were to translate the idea into a capital budgeting framework, how would you do it? What factors would you need to consider in your analysis? These will be very general in nature–not specific dollar amounts.
3. Describe any positive or negative externalities that might result from the project. (NOTE: externalities are benefits/costs outside of the original transaction–e.g., pollution control results in better health outcomes).
Rates, Markets and CAPM
We’ll discuss the definitions of various interest rates, what the determinants are behind the rates observed in the markets.
Then we’ll focus on markets themselves, distinguishing between money markets, debt markets and equity markets.
We’ll discuss how they’re structured, the constraints under which they operate, and the theory behind how asset values are determined by the equity markets according to the Capital Asset Pricing Model, and other valuation models.