EMPIRICAL RELATION OF DISCOUNT RATE AND STOCK PRICE ON LONG TERM LOAN

(A CASE STUDY OF PAKISTAN) BY YASIR REHMAN

MBA (FINANCE)

(FEDERAL URDU UNIVERSITY KARACHI)

Presented by

IRFAN LALANI
MS (FINANCE)

INTRODUCTION
The business of banks is going to grow quickly in coming days. Discount rates & stock price play an important role in the banking sectors. Discount rate is an interest rate a central bank charges depository institutions that borrow reserves from it. Decrease in the discount rates would encourage the investors to increase their borrowing and if there is increase in the discount rates would 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 and when there is decrease of money in the market SBP lower the discount rate.

 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 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.

PROBLEM STATEMENT
To identify the impact of discount

rate & stock price on long term loans.

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 why changes in discount rates & stock price can create great impact on banking sector.

RESEARCH QUESTION
How to find out the impact of discount rate and stock prices on long term loan???

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

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 simple cash 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.

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.

RESULTS & DATA ANALYSIS

Adjusted R square Model R R square Std. error of the estimate

483a

.233

.210

37704836.50

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.

Model 1 Regression

Sum of squares 2.893E16

df 2

Mean square

Sig.

Residual
Total

9.525E16
1.242E17

67
69

1.447E16 1.422E15

10.175

.000a

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.

Standardized Understand Coefficients Model 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 B Std. Error Coefficients Beta T Sig.

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.

CONCLUSIONS
The empirical findings suggested that there is a positive relationship between discount 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 validity of 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 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.

RECOMMENDATION
Future research may be included other variables which can influence long-term loan. Long-term loan is the most important variable for the banks. 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.