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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 would have 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.

TABLE OF CONTENTS Acknowledgements .ii Abstractiii List of tables.v CHAPTER 1: INTRODUCTION .1 1.1 1.2 1.3 Overview 1 1.2 Problem Statement ..2 Hypotheses ............2

CHAPTER 2: LITERATURE REVIEW 3 CHAPTER 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 Recommendation 15 5.5 Conclusion 14 5.2 Recommendation and Future analysis 15 REFERENCES ..17 Appendix ..20

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

Discount Rate on Long Term Loans

CHAPTER 01: INTRODUCTION 1.1 OVERVIEW Banks 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

Discount Rate on Long Term Loans

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 these institutions. 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.

Discount Rate on Long Term Loans


Problem Statement: To identify the impact of discount rate & stock price on long term loans


Research Hypotheses: H1: discount rate has an impact on the long term loans. H2: stock prices have an impact on the long term loan.

Discount Rate on Long Term Loans


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 private credit 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

Discount Rate on Long Term Loans

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 discipline and 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

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 for determining 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

Discount Rate on Long Term Loans

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 longterm 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

Discount Rate on Long Term Loans

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

Discount Rate on Long Term Loans

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).

Discount Rate on Long Term Loans

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.

Discount Rate on Long Term Loans


3.3.2 Independent Variables: There are two independent variables in the research stock price and discount rate. Stock Price: The yearly stock price data was collected from the KSE website. 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.

Discount Rate on Long Term Loans


CHAPTER 04: RESULTS 4.1 Variables: 4.1 Dependent Variable: Long term loans (LTL) 4.1.2 Independent Variable: 1) Stock Prices 2) Discount Rate 4.2 Model: Long Term Loans (LTL) = 0 + 1 (Stock prices) + 2 (discount rate) + Table 4.1 Variables entered/ removed b Model 1 Variables Entered Stock prices, discount rate Variables Removed Method Enter

a. All requested variables entered. b. Dependent variable: long-term

Discount Rate on Long Term Loans


Table 4.2 Model Summaryb Adjusted R Model 1 R 483a R square .233 square .210 Std. error of the estimate 37704836.50

a. Predictors: (Constant), Stock prices, discount rate b. 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 Sum of Model 1 Regression Residual Total squares 2.893E16 9.525E16 1.242E17 df 2 67 69 Mean square 1.447E16 1.422E15 F Sig.



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

Discount Rate on Long Term Loans


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 that independent 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 Standardize d Coefficients Beta

Model 1 (Constant) Discount rate Stock prices

Understand Coefficients B Std. Error -2857932.89 5463882.88 3 290265.421 3025978.78 2669208.11 0 67858.367

Sig. .34 -.944 8 2.04 7 4.27 8 .04 5 .00 0

.221 .463

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. 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 by 5463882.883 Rs. One rupee (Rs) increase in stock price will increase the long term loans by 290265.421 Rs.

Discount Rate on Long Term Loans


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

Discount Rate on Long Term Loans


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 be included 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.

Discount Rate on Long Term Loans


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 bank profitability: an empirical investigation. The journal of finance, 36(5), 10851101. Helms H.-K.W. (1984). Confidential bank examination data and the efficiency of bank share prices. Financial analysts journal, 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 of finance, 37(3), 809-825. John, R. (1990). Using the wrong discount rate to allocate an exhaustible resources. American journal of agricultural economics , 72(1), 121-130. Nishimura kazoo, G.S. (1994). Ergodic chaos in optimal growth models with low discount rates. Economic theory, 4(5), 705-717. Sandeep dahiya, M. P. (2003). Bank borrowers and loan sales: new evidence 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 Loan Loss Disclosures. The accounting review, 69(3), 455-478.

Discount Rate on Long Term Loans


Discount rate Long-term Pre_1 Zre_1 Stock prices Numeric Numeric Numeric Numeric Numeric 8 8 11 11 8 2 2 5 5 2 None None None None None None None None None None 8 29 13 13 8 Right Scale Right Right Right Right Scale Scale Scale Scale

Residuals Statistics
Minimum Maximum Mean Predicated 2.2123E7 1.3495E8 4.9891E7 Residual 9.95273E7 .00000 Std. predicted 6.1663E7 4.154 .000 value -1.356 2.640 .000 Std. residual -1.635 a. Dependent Variable: long-term Std. deviation 2.04763E7 3.71544E7 1.000 .985 N 70 70 70 70

Discount Rate on Long Term Loans


Dependent Variable: long-term Mean = 8.21EStd.Dev. =

16 0.985


Regression Standardized Residual

Discount Rate on Long Term Loans


Normal P-P Plot of Regression Standardized Residual

Dependant Variable: long-term

Expected Cum Prob

Observed Cum Prob

Discount Rate on Long Term Loans



Discount rates 13.2 % 12.6 % 9.0 % 9.5 % 10.0 % 13.2 % 12.6 % 9.0 % 9.5 % 10.0 % 13.2 % 12.6 % 9.0 % 9.5 % 10.0 % 13.2 % 12.6 % 9.0 % 9.5 % 10.0 % 13.2 % 12.6 % 9.0 %

Long term loans 56,050,200 65,960,365 64.658.338 64,691.318 48,016,917 90,852,973 115,821,763 75,752,190 62,252,015 52,252,015 97,399,464 64991645 56.389.910 51.680.419 35.319.539 1333.452.488 102.994.413 108,452,328 119,813,672 94,944,038 113,280,205 109,721,205 84,552,685

Stock price 12.81925 43.04068 39.97531 32.45184 29.7591 171.216 326.1734 313.1107 199.361 84.26218 43.62012 100.0372 116.99 92.15456 65.84556 103.7473 208.8214 255.5895 48.19947 112.2127 143.945

Discount Rate on Long Term Loans


Banks UBL UBL Bank al Habib Bank al Habib Bank al Habib Bank al Habib Askari Bank Askari Bank Askari Bank Askari Bank Askari Bank Faysal Bank Faysal Bank Faysal Bank Faysal Bank Faysal bank Kasb bank Kasb bank Kas bank Kasb bank Kasb bank Nib bank Nib ban k Nib bank

Discount rates 9.5 % 10.0 % 13.2 % 12.6 % 9.0 % 10.0 % 13.2 % 12.6 % 9.0 % 9.5 10.0% 13.2% 12.6% 9.0% 9.5% 10.0 % 13.2% 12.6% 9.0% 9.5% 10.0% 13.2% 12.6% 9.0%

Long term loans 91,471,122 71,072,975 19,891,791 17,921,161 14,399,600 10,329,847 28,257,317 28,787,728 26816341 25.458.048 21.042.378 37.148.353 50.628.504 30.768.128 28.990.616 6.689.838 5.078.204 3.059.657 2.522.107 38.445.279 3.559.663

Stock price 111.4192 66.04166 28.68557 52.36328 67.63642 53.36827 19.13711 49.56932 65.53226 48.34484 45.29441 3.00617 42.9401 69.53668 68.96556 56.04538 8.057421 18.3036 18.943 15.96435 12.89597 5.238748 14.38373 22.3541

Discount Rate on Long Term Loans


Banks Nib bank Nib bank Habib metro bank Habib metro bank Habib metro bank Habib metro bank Habib metro bank National bank National bank National bank National bank National bank Bank islami Bank islami Bank islami Bank islami Bank islami Meezan bank Meezan bank Meezan bank Meezan bank Meezan bank

Discount rates 9.5% 10.0% 13.2% 12.6% 9.0% 9.5% 10.0% 13.2% 12.6% 9.0% 9.5% 10.0% 13.2% 12.6% 9.0% 9.5% 10.0% 13.2% 12.6% 9.0% 9.5% 10.0%

Long term loans 6.634.413 2.707.662 14.176.114 11.507.769 9.859.876 16.798.895 2.936.989 164.532.669 123.180.475 125.547.920 146.652.701 111.806.093 4.928.619 3.808.405 3.029.868 391.245 4.680 16.506.576 18.028.999 12.144.488 9.410.441 6.529.700

Stock price 24.54705 26.04244 28.31791 51.80503 78.96029 73.91538 0 50.09373 100.3621 139.7529 122.7828 62.17487 6.305011 15.3577 12.64342 12.25343 0 13.45868 34.7401 28.75225 24.75913 16.20638