Theses 27 Pages

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ABSTRACT

The objective of this research was to find out the impact of discount rate

and stock prices on long term loan. For analysis, a sample of 15 listed banks

was taken out of 30. In this research, variables data was taken from the period

of 2006-2010. Multiple regression technique was used to analyze the

relationship between discount rate and stack prices on long term loan. A

positive relation was found between discount rate and stock prices on long

term loan. This study would help investor in investing because they wouldhave a clear picture about firm stock price. I the firm stock price would

increase than investor would encourage invest/borrow from that firm. This

study is also showing that discount rate and stock prices are the key factors

for long term loans.


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TABLE OF CONTENTS

Acknowledgements .ii

Abstractiii

List of tables.v

CHAPTER 1: INTRODUCTION .1

1.1 Overview 11.2 1.2 Problem Statement ..21.3 Hypotheses ............2CHAPTER 2: LITERATURE REVIEW 3CHAPTER 3: RESEARCH METHODOLOGY ..9

3.1 Source of Date 9

3.2 Sample Size ..9

3.3 Explanations of the Variables 9

3.4 Hypothesis Development 10

3.5 The Regression Model10

3.6 Statistical Tool to be used 10

Chapter 4: Results & Analysis..11

4.1 Variables ..11

4.2 Model11

CHAPTER 5: CONCLUSION and Recommendation15

5.5 Conclusion 14

5.2 Recommendation and Future analysis 15

REFERENCES ..17

Appendix ..20


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LIST OF TABLE

Table 4.1 Variables Enter/Removed 11

Table 4.2 Model Summary...12

Table 4.3 ANOVA12

Table 4.4 Coefficients...13


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Discount Rate on Long Term Loans 1

CHAPTER 01: INTRODUCTION

1.1 OVERVIEWBanks are playing an important role in certain social and benevolent

matter. Banks lead from a small shop to huge corporate firms and

multinationals. The banking has influenced all walks of life and this

influence is constantly increasing. The business of banks is going to grow

quickly in coming days. Banks would be focusing at entering new fields of

business and trade. Banks can play efficient role in nation building process.

On behalf of a government a central bank flaws funds and perform as its

financial power by applying monetary policy, which regulates the money

supply.

Discount rates & stock price play an important role in the banking sectors.

The discount rate is an interest rate a central bank charges depository

institutions that borrow reserves from it. Many researchers believe that if

there is decrease in the discount rates it would encourage the investors to

increase their borrowing and if there is increase in the discount rates it

would discourage the investors to decrease their borrowing because it

would affect the cost of capital of the companies, when there is increase of

money in the market SBP lower the discount rate and when there is

decrease of money in the market SBP lower the discount rate. This is the

general phenomena. The rate is set on the basis of market condition by

SBP.

A commercial bank accept deposits and pools those funds to supply credit,

either directly by lending, or indirectly by investing through the capital


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markets. Inside the global financial markets, these institutions join those

members who have insufficient capital to invest are given fund by those

members who have sufficient funds. This is the main task Of theseinstitutions. Who have excess finances to advance (financial assets) to

those parties who borrow finances to advance in real assets.

During the past year, the Federal Reserve System, before the appearance of

new financial markets, the discount rate was the key tool of monetary

policy. Discount rate only in contemporary times than open market

operations conducted by banks is less effective in controlling the amount of

reserves. Banks make use of reserves from the SBP for causes missing from

the discount rate significance a higher or lower discount rate might have

very small impact on treasury and the funds supply. Banks normally have

less funds could borrow reserves on discount rate from SBP,

This research helps the (borrowers or investors) to increase or decrease

their investment according to discount rates & stock price of the bank and

it would also helps state bank of Pakistan to offer discount rates according

to the situation. The purpose of this research is to find out the reliability of

discount rates & stack price as the predictor of banking sector in Pakistan

the relationship between and why changes in discount rates & stock price

can create great impact on banking sector.


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CHAPTER 02: LITERATURE REVIEW

Open market operation is also the one of the most important

activity. Which can forever offer liquidity to the monetary scheme,

except how can that liquidity be measure to individual firm in a crises

situation? Good friend and king (1988) argue that the monitory power

ought to not at all provide loans to individual banks since private

lenders can superlative recognize in the money but illiquid

establishments. Open market operation composes an enough policy

response to all examples of financial illiquidity, merely but privatecredit markets carry on functioning well, still for the duration of an

emergency. Sometimes government or the central bank should act as

lender of last resort (LLR), and government must provide liquidity to

individual banks which cannot raise fund in private market. Good hart

(1988) have made conclusion on the fact that mostly banks specializes

in financing assets which are essentially difficult to value.

Concentration of illiquid bank solvency problem that is convincing

private lenders, credit LLR normal version that should give rise to

solvents, illiquid but banks can. The complexity of course lies in

shaping which illiquid banks are in the money. The government may

have improved information concerning banks solvency than market

investors have, the most favorable societal strategy might be for the

central bank to let somebody borrow in a straight line to illiquid

institutions. Kaufman (1991) passionately gives your support to this

sight that a central bank should bound its lender of last resort tricks to

make available common market liquidity throughout open market


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process. According to these author LLR individual banks to expand

credit default risk (social investment) that the central bank to help

insolvent institutions will bow down, Thus blunting market disciplineand riskier, less efficient banks production. The essential condition of

government involvement in credit markets in not means that private

markets are doing a worst job, but the government could perform well.

Except that the government has better information about individual

banks solvency. It is not easy to defend the intention that a government

LLR should put out of place private credit decisions and evaluation

during a crisis. It is extremely essential to difference this analysis of the

suitable fed discount rate with Bagehots classical analysis that within

and emergency the central bank should lend without restraint, however

at consequence rate. But the SBP put a penalty rate on credit for the

duration of my sort of monetary emergency, this might be bear a

winners blight in comparison among private lenders, potentially rising

its rate of participation. In an emergency, the Federal Reserve must

position set to support financially credit in order to keep away from the

winners curses that administer private loan pricing decision. Except we

consider that private banks and investors routinely make bad lending

value assessment, there is small require for unsaved discount window

loans during normal time. While credit markets are implementation

fine, the LLRs only benefit lies into its skill to give good quality finances

extra rapidly than the concerned bank can lift up them by asset

transaction or secret borrowing. though, such move forward have to be

reserved very short term following which a solvent bank should be


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capable to put up for sale asset or safe funding from private lenders. But

for the discount window proprietor is unspecified to be familiar with

additional concerning a banks proper form than the market does, so

there is no cause to expand loans for very long (Flannery.J, 1996) the

associating between two ranking of lifetime earnings is based on the

logic of human capital theory it include that the present.Values of

lifetime earnings are computed using the discount rate applied by

individuals when making their labor market choice, further, inequalities

will come into view when higher or lower discount rates are used. (Sue,

H.K, 1985) the discount rate has long been recognized as critical fordetermining the well-organized allocation of an exhaustible resource. It

is found that, over the (real) discount rate range of 6% to 9% the

welfare suffers of employing a rate no more than 3% different from the

social rate are small and decline as the social rate rises, even for severe

supply situation. (Johns, 1990) this approach appears commanding in

terms of simplifying compound capital budgeting by placing only weak

limitations on allowable liking, very simple cash flow uniqueness are

used in this paper to select most-preferred projects for any individual

within the genera class. Assuming that discount rates are positive and

steady over time, 26 out of 30 equally exclusive projects could straight

away be disregarded by every individual, despite of what specific value

is taken on by this discount rate (Bohren & Terje, 1980) the common

perception is that commercial banks borrowing short and lending long,

said the sharp increases in market interest rates, a significant number

of banking failures may bring on. And effectively to major with similar

average maturities of asset and liability portfolios of credit risk against


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the market rate is hedged. (Flannery. J, 1981) financial information

must be conveyed to bank by the borrowers. Special audit is required

for loan contract and the evaluation of assets used as collateral.Moreover the borrower usually in legal costs for setting up the loan

agreement requires the bank back. Their borrowing costs by setting up

a transaction specific investment. The existence of transaction costs in

the credit markets a specific agreements or commitments under long-

term incentive to make offers. Loan agreement requires substantial

investment.(James, 1982) disputes relating to the implications of budget

constraints, most of the revenue effect concerns the sign and magnitude.

Very little emphasis has been placed on interest rates has been

analyzing the impact. Most writers have simply assumed that interest

rates will increase with government deficit spending, when the bond

demand decrease and bond supply increase than the interest rate will

increase with an increase in expected inflation. Similarly when

unemployment rate increases then both, supply and demand of private

bonds must fall. Therefore the impact of cyclical activity on interest

rates in quite ambiguous. Impact of government borrowing on interest

rates should be positive course. Purchase of government securities by

the fed loan able funds and liquidity for the effects of normal offset,

(Hoelscher. P, 1983) new with this reduction in treasury debt, federal

agency debt has increased significantly. Federal agency debt market,

government agencies or government-sponsored enterprises (GSEs),

congressionally designated by congress chartered mission consists of

securities issued by institutions with are required. Period between 1996


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and 2000 the percent of total loans 9.6 GSEs, the federal debt to 76

percent to $ 1.7 trillion from $ 896 billion during refused (1 structure,

see figure).agency debt market size in 2007 by Fleming notes (2000),treasury market may leave behind. Federal home loan bank system

(FHLB) includes twelve member banks that were made in 1932 by an

act that contains and it gives short and long term loans to its associate.

Federal home loan banks to fund the work of local lenders that finance

home mortgage loan are to increase supply. Twelve district banks as a

whole and their member institutions are owned by problem loans

combined commitment. At the end of 2000, FHLB issue discount bonds

and notes stood at 1.05 trillion dollars. The treasury department is

certified to purchase FHLB securities. W. (Ambrose, T.D, 2002) several

Observations are immediate. First the relatively large size of the stock,

the difference between 3% and 12% of the solution. Second, depletion

of the major changes occurs when a low discount rate instead of a

higher discount rate is increased by the amount of increase of one

percentage point. This is partly because each percentage point increases

in the discount rate- the ratio of a higher discount rate. Third a low

discount rate is greater, 9% to 12% rage for the discount rate on

consumption remarkably similar. (John. R, 1990) shows that as stated,

the study found that the quality of bank loans, the examiners decisions

are correct, so you know, stock prices should affect the rating of 25

private banks, although not perfect, that bank stock prices reflect

changes in banks current ranking of 15 months beyond the original

changes. Consequently, the disclosure of classified information about


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important and relevant to investors can not; inasmuch as the ratings of the

information has already been discounted by the market. (Helm, H-K.W, 1984)this study analyzes each of these disclosures for in formation about future

bank cash flows and inspected how investors take away this information in

bank stock prices. Commercial bank loan portfolio are usually 10 to 15 times

bigger than bank equity therefore bank loan portfolio cash flows and default

risks are liable to have an important impact on bank stock market values.

Bank financial statements provide three separate disclosures of changing

default risks: nonperforming loans, loan loss provisions and loan charge offs

(Nishimura kazoo, G.S, 1994). For loans in the secondary debt market is

composed of two types. First primary, or syndicated credit market, which is

part of a loan, often with a large number of banks, is placed with, and as part

of the loan process started (normally known as the sale of Participations),

other types of experience, or secondary, in which a bank loan sales market as

a result of closing an existing debt (or part of the loan) is sold. Experience

credit for the sale of a number of reasons have been identified in previous

literature, there are those borrowers whose loans or credit on sales return on

sales, banks no empirical effect of such sales has been studied (Sandeep

Dahiya, M.P, 2003).


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CHAPTER 03: REASEARCH METHODS

This chapter explains the methodology used for this research study. The

study focuses on the impact of discount rate and stock price on long term

loans. Methodology is the important part of the research because it can solve

problems and discover new knowledge.

3.1 Method of Date Collection:

Secondary data is used in the research. This study is based on the

financial data of five years from 2006 to 2010 and 15 banks data is collected

that was listed on KSE 100 index. The main source of data is the state bank of

Pakistan website and KSE website.

3.2 Sample Size:

This study focused on the long term loans, discount rate and stock price

since last five years of the date.

3.3 Explanation of Variables:

In this section we present the description of these variables, how they

are measured and what empirical evidence was found by previous studies.

3.3.1 Long Term Loans (Dependent Variable):

Long term loans are the dependent variable of the research. The long

term loans data is collected from the 15 banks annual report. In annual

reports the loan term loans is already calculated.


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3.3.2 Independent Variables:

There are two independent variables in the research stock price and

discount rate.

3.3.2.1 Stock Price:

The yearly stock price data was collected from the KSE website.

3.3.2.2 Discount Rate:

Discount rate data is collected from state bank of Pakistan website

(Handbook of statistics on Pakistan economy) from the list of federal

government revenue receipts.

3.4 Hypotheses Development:

H1: stock price has an impact on the long term loans.

H2: discount rate has an impact on the long term loans.

3.5 The Regression Model:

Long term loans (LTL) =0+ 1 (Stock price) + 2 (discount rate) +

3.6 Statistical Tools to be used:

In the research multi linear regression is used because there are more

than two scale variables and in the research articles multi linear regression

was used.


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Table 4.2

Model Summaryb

Model R R square

Adjusted R

square

Std. error of

the estimate

1 483a .233 .210 37704836.50

a. Predictors: (Constant), Stock prices, discount rateb. Dependent Variable: long-term

Adjusted R square shows that only 21% of variation in the dependent

variable is explained by the predictors variables named discount rate and

stock price. Adjusted R square should be at least 45% or greater but 21%

shows very weak explanation. R square shows that 23.3% of the variations

in dependent variable (Long term loan) are explained by the mode.

Sig. F value shows the overall significance of the model and Fig. value

is.000 which shows that the model is significant because the value of sig.

should be less than 0.05 for model significance.

Table 4.3

Anovab

Model

Sum of

squares df

Mean

square F

Sig.

1

Regression

Residual

Total

2.893E16

9.525E16

1.242E17

2

67

69

1.447E16

1.422E1510.175 .000a

a. Predictors: (Constant), Stock prices, discount rateb. Dependent Variable: Long-term


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The Sig value is 0.000 which is lower than the 00.5 to be accepted

as a mode. This shows that the model is significant and it tells thatindependent variables consistently predict the dependent variable. And

the F value is 10.175 this is greater than the minimum cutoff point 3.84.

Therefore F value is significant. And this shows short term impact of

discount rate and stock price on long-term loans.

TABLE 4.4

Coefficientsa

Model

Understand Coefficients

Standardized

Coefficients

T Sig.B Std. Error Beta

1 (Constant)

Discount rate

Stock prices

-2857932.89

5463882.883

290265.421

3025978.78

2669208.110

67858.367

.221

.463

-.944

2.047

4.278

.348

.045

.000

Stock price sig. value is 0.000 and discount rate sig. value is 0.045

indicating that both are significant because both are less than the 0.05.

The T values of Stock price and discount rate are 4.278 and 2.047

respectively. Both the values are positive which shows positive

relationship between the stock price and discount rate with long-term


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loans. It means that when discount rate and stock price increases then the

long term loans will also increase. It can also be described as when the

stock price of banks will increase the investors/companies should go for

the long term loan.

Finally the equation which derives from analyzes is:

Long term loans (LTL) = .28572932.89 + 5463882.883 (Discount Rate) +290265.421 (Stock price) +

The above noted equation shows following conclusion:

One percent increase in discount rate will increase the long term loans by5463882.883 Rs.

One rupee (Rs) increase in stock price will increase the long term loans by290265.421 Rs.


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CHAPTER 05: CONCLUSION, DISCUSSIONS,

IMPLICAIONTS, LIMITATION, FUTURE RESEARCH

The objective of this study was to find out the relationship between

discount rate and stock prices on long terms loan. This was done for a

period of five years (2006 through 2010). It was based on a sample of

publicly quoted companies in the Pakistan.

The empirical findings suggested that there is a positive relationship

between discount rate and stock prices on long terms loan.

The table 3 shows the summary output for the regression analysis. The R

square shows that 23.3% of the variations in the dependent variable (Long

term Loan) is explained by the mode. The F-statistics shows the validity of

the model as its 10.175 at the level of significance value 0.000.

From table 5 it can be seen that all the variables shows the same

relationship as expected at 5 % level of significance. Analyzing the results

for the effects of independent variable on dependent variable, it was found

that the variable discount rate is positively correlated with long term loan

with (=0.221). This suggested when ever increased in the discount rate

would increase in the long term loan and vice versa, the statistical

significance also support hypothesis. Therefore first hypothesis is

accepted.

The second variable stock prices is also positively correlated with long

term loan (=463). This suggested that whenever increased in the stock


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Prices causes to increase the investors will go for it. Because investors

know that this firm is more stable because it stock price. In increasing

.therefore second hypothesis is also accepted. Future research may beincluded other variables which can influence long-term loan. Long-term

loan is the most important variable for the banks. This variable is included

in the advances section and banks earn profit though advances.

Future research

Several conclusions could easily be taken out from the current profitability

profile of the banking industry in Pakistan. It is good to observe that the

banking industry of the country continues to be rising regardless of the

particular sector was the worst hit by the global recession starting in 2007.

In us and western Europe, where governments had to force in billions of

dollars to save the banking system from total fall down, the financial sector

in Pakistan contributed to the government exchequer fairly a lot.

These results were varying because in various countries, there was

difference in environments, political, economical and circumstances and

firms usually made decision accordingly. Other variables can also affect

long-term loans of banks.


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REFERENCES

Ambrose, T.D. (2002). GSE debt and the decline in the treasury debt

market. Journal of money. Credit and banking, 34 (3), 812-839.

Flannery, M.J. (1981). Market interest rates and commercial bankprofitability: an empirical investigation. The journal of finance, 36(5), 1085-1101.

Helms H.-K.W. (1984). Confidential bank examination data and theefficiency of bank share prices. Financial analystsjournal,40(6), 31-33.

Hoelscher, G.P. (1983). Federal borrowing and short term interest rates.Southern economic journal, 50(2), 319-333.

James, C.(1982). An analysis of bank loan rate indexation. The journal offinance, 37(3), 809-825.

John, R. (1990). Using the wrong discount rate to allocate an exhaustibleresources.American journal of agricultural economics, 72(1), 121-130.

Nishimura kazoo, G.S. (1994). Ergodic chaos in optimal growth modelswith low discount rates. Economic theory,4(5), 705-717.

Sandeep dahiya, M. P. (2003). Bank borrowers and loan sales: newevidence on the uniquencess of bank loans. The journal of business, 76(4),563-582.

Sue, H.K. (1985). Discount rates and the distribution of lifetime earning.The journal of human recourse, 20(3), 346-360.

Wahlen, J. M. (1994). The Nature of information ins Commercial Bank LoanLoss Disclosures. The accounting review, 69(3), 455-478.


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APPENDIX

Discount

rate

Numeric 8 2 None None 8 Right Scale

Long-term Numeric 8 2 None None 29 Right Scale

Pre_1 Numeric 11 5 None None 13 Right Scale

Zre_1 Numeric 11 5 None None 13 Right Scale

Stockprices

Numeric 8 2 None None 8 Right Scale

Residuals Statistics

Minimum Maximum Mean Std. deviation N

PredicatedResidual

Std. predictedvalue

Std. residual

2.2123E7-

6.1663E7-1.356

-1.635

1.3495E89.95273E7

4.154

2.640

4.9891E7.00000

.000

.000

2.04763E73.71544E7

1.000

.985

707070

70a. Dependent Variable: long-term


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Histogram

Dependent Variable: long-term

Mean = 8.21E-16

Std.Dev. =0.985

N=70

Regression Standardized Residual

Fr

e

uenc


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Normal P-P Plot of RegressionStandardized Residual

Dependant Variable: long-term

Observed Cum Prob

Ex

ec

tedCum

Prob


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Banks Discount ratesLong term

loansStock price

Bank AL Falah 13.2 % 56,050,200 12.81925Bank AL Falah 12.6 % 65,960,365 43.04068

Bank AL Falah 9.0 % 64.658.338 39.97531

Bank AL Falah 9.5 % 64,691.318 32.45184Bank AL Falah 10.0 % 48,016,917 29.7591

MCB 13.2 % 90,852,973 171.216

MCB 12.6 % 115,821,763 326.1734

MCB 9.0 % 75,752,190 313.1107MCB 9.5 % 62,252,015 199.361

MCB 10.0 % 52,252,015 84.26218

ABL 13.2 % 97,399,464 43.62012ABL 12.6 % 64991645 100.0372

ABL 9.0 % 56.389.910 116.99

ABL 9.5 % 51.680.419 92.15456ABL 10.0 % 35.319.539 65.84556HBL 13.2 % 1333.452.488 103.7473

HBL 12.6 % 102.994.413 208.8214

HBL 9.0 % 108,452,328 255.5895HBL 9.5 % 119,813,672

HBL 10.0 % 94,944,038UBL 13.2 % 113,280,205 48.19947

UBL 12.6 % 109,721,205 112.2127

UBL 9.0 %84,552,685

143.945


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loansStock price

UBL 9.5 % 91,471,122 111.4192UBL 10.0 % 71,072,975 66.04166

Bank al Habib 13.2 % 19,891,791 28.68557

Bank al Habib 12.6 % 17,921,161 52.36328Bank al Habib 9.0 % 14,399,600 67.63642

Bank al Habib 10.0 % 10,329,847 53.36827

Askari Bank 13.2 % 28,257,317 19.13711

Askari Bank 12.6 % 28,787,728 49.56932Askari Bank 9.0 % 26816341 65.53226

Askari Bank 9.5 25.458.048 48.34484

Askari Bank 10.0% 21.042.378 45.29441Faysal Bank 13.2% 37.148.353 3.00617

Faysal Bank 12.6% 50.628.504 42.9401

Faysal Bank 9.0% 30.768.128 69.53668Faysal Bank 9.5% 28.990.616 68.96556Faysal bank 10.0 % 56.04538

Kasb bank 13.2% 8.057421

Kasb bank 12.6% 6.689.838 18.3036Kas bank 9.0% 5.078.204 18.943

Kasb bank 9.5% 3.059.657 15.96435Kasb bank 10.0% 2.522.107 12.89597

Nib bank 13.2% 38.445.279 5.238748Nib ban k 12.6% 14.38373

Nib bank 9.0% 3.559.663 22.3541


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loansStock price

Nib bank 9.5% 6.634.413 24.54705Nib bank 10.0% 2.707.662 26.04244

Habib metrobank

13.2% 14.176.114 28.31791

Habib metrobank

12.6% 11.507.769 51.80503

Habib metrobank

9.0% 9.859.876 78.96029

Habib metrobank

9.5% 16.798.895 73.91538

Habib metrobank

10.0% 2.936.989 0

National bank 13.2% 164.532.669 50.09373

National bank 12.6% 123.180.475 100.3621

National bank 9.0% 125.547.920 139.7529

National bank 9.5% 146.652.701 122.7828National bank 10.0% 111.806.093 62.17487

Bank islami 13.2% 4.928.619 6.305011Bank islami 12.6% 3.808.405 15.3577

Bank islami 9.0% 3.029.868 12.64342Bank islami 9.5% 391.245 12.25343

Bank islami 10.0% 4.680 0

Meezan bank 13.2% 16.506.576 13.45868Meezan bank 12.6% 18.028.999 34.7401

Meezan bank 9.0% 12.144.488 28.75225

Meezan bank 9.5% 9.410.441 24.75913Meezan bank 10.0% 6.529.700 16.20638

Documents

Theses 27 Pages