Irfan Lalani

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    EMPIRICAL RELATION OF DISCOUNT RATEAND STOCK PRICE ON LONG TERM LOAN

    (A CASE STUDY OF PAKISTAN)BY

    YASIR REHMANMBA (FINANCE)

    (FEDERAL URDU UNIVERSITY KARACHI)

    Presented by

    IRFAN LALANIMS (FINANCE)

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    INTRODUCTION

    The business of banks is going to grow quickly in coming days.

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

    Discount rate is an interest rate a central bank charges depositoryinstitutions that borrow reserves from it.

    Decrease in the discount rates would encourage the investors toincrease their borrowing and if there is increase in the discount rateswould discourage the investors to decrease borrowing because it

    would affect the cost of capital of the companies.

    Increase of money in the market SBP lower the discount rate andwhen there is decrease of money in the market SBP lower thediscount rate.

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    A commercial bank accept deposits and pools those

    funds to supply credit, either directly by lending, or

    indirectly by investing through the capital market.

    Inside the global financial markets, these institutions join

    those members who have insufficient capital to invest

    are given fund by those members who have sufficientfunds.

    This is the main task of these institutions who have

    excess finances to advance (financial assets) to thoseparties who borrow finances to advance in real assets.

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    PROBLEM STATEMENT

    To identify the impact of discount

    rate & stock price on long termloans.

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    OBJECTIVE

    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 whychanges in discount rates & stock price

    can create great impact on banking

    sector.

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    RESEARCH QUESTION

    How to find out the impact of

    discount rate and stock prices onlong term loan???

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    RESEARCH HYPOTHESIS

    H1:discount rate has an impact onthe long term loans.

    H2:stock prices have an impact onthe long term loan.

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    LITERATURE REVIEW

    Sue, H.K. (1985) the discount rate has long been recognized as critical for

    determining the well-organized allocation of an exhaustible resource.

    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.

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

    financing assets which are essentially difficult to value.

    Johns(1990) this approach appears commanding in terms of simplifying compound

    capital budgeting by placing only weak limitations on allowable liking, very simplecash flow uniqueness are used in this paper to select most-preferred projects for any

    individual within the genera class.

    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 process.

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    RESEARCH METHODOLOGY

    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.

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

    they are measured and what empirical evidence was found by

    previous studies.

    Long term loans are the dependent variable of the research.

    Stock Price & Discount rate are the independent variables of the

    research.

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    RESULTS & DATA ANALYSIS

    Model R R squareAdjusted R

    squareStd. error of

    the estimate1 483a .233 .210 37704836.50

    Adjusted R square shows that only 21% of variation in thedependent variable is explained by the predictors variables

    named discount rate and stock price. Adjusted R square shouldbe at least 45% or greater but 21% shows very weak

    explanation. R square shows that 23.3% of the variations independent variable (Long term loan) are explained by the

    mode.

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    Model Sum of squares df Mean square F Sig.1 Regression

    ResidualTotal

    2.893E16

    9.525E16

    1.242E17

    26769

    1.447E16

    1.422E15 10.175 .000a

    The Sig value is 0.000 which is lower than the00.5 to be accepted as a mode. This shows that the

    model is significant and it tells that independent

    variables consistently predict the dependent variable.And the F value is 10.175 this is greater than theminimum cutoff point 3.84. Therefore F value issignificant. And this shows short term impact of

    discount rate and stock price on long-term loans.

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    ModelUnderstand Coefficients

    Standardized

    CoefficientsT Sig.B Std. Error Beta

    1. (Constant)Discount

    rateStock

    prices

    -2857932.895463882.883290265.421

    3025978.782669208.110

    67858.367.221.463

    -.9442.0474.278

    .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 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.

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    Finally the equation which derives fromanalyzes is:

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

    The above noted equation shows followingconclusion:

    One percent increase in discount rate willincrease the long term loans by 5463882.883

    Rs.

    One rupee (Rs) increase in stock price willincrease the long term loans by 290265.421 Rs.

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    CONCLUSIONS

    The empirical findings suggested that there is a positive relationship betweendiscount rate and stock prices on long terms loan.

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

    It can be seen that all the variables shows the same relationship as expected at5 % level of significance.

    Analyzing the results for the effects of independent variable on dependentvariable, it was found that the variable discount rate is positively correlatedwith 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 supporthypothesis. Therefore first hypothesis is accepted.

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    RECOMMENDATION

    Future research may be included other variables which caninfluence long-term loan. Long-term loan is the mostimportant variable for the banks.

    It is good to observe that the banking industry of thecountry continues to be rising regardless of the particularsector was the worst hit by the global recession starting in2007.

    In us and western Europe, where governments had to forcein billions of dollars to save the banking system from totalfall down, the financial sector in Pakistan contributed to thegovernment exchequer fairly a lot.

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