In order to stimulate the economy and in the wake of declining inflation, SBP kept reducing the discount rate to encourage private sector credit, which otherwise was being invested in Treasury Bills earning a

risk free rate of return. The current discount rate is stable at 10 percent, which have been increased once again in consecutive monetary policy decisions.

where: k - rate of return expected by capital donors and at the same time (from organization's perspective) - organization cost of financing capital rate, [k.sub.e] - for capital coming from owners (cost of fund capital rate), [k.sub.M] - for average rate of return on typical investment on the market, [k.sub.RF] - for

risk free rate of return whose approximation is an average profitability of Treasury bills in the country where the investment is made.

In principle, cost of equity consists of the

risk free rate of return and the premium expected for risk which investors could incur when investing in company's equity.

The second graph of Figure 9 shows that under all the three conditions when the riskfree rate of return increases the individual reduces life insurance purchases, though at different speeds--faster under Case 2 (when the stock return is fixed ) than under Case 1 (when stock return increases with the

risk free rate of return).

Investors require risk premium over the

risk free rate of return if they invest in stocks.

Here, S is the current stock price, N([d.sub.1]) and N([d.sub.2]) represent cumulative probability distributions, K is the option strike price, r is the

risk free rate of return, t is the fraction of the year remaining until expiration and a is the standard deviation of the annual rate of return on the underlying security.

In a similar way you can analyze an investment project by substituting the expenditures required for the investment for the exercise price, the value of the assets that will be acquired in making the investment for the stock price, the length of time the investment may be deferred as the time to expiration for the option, the risk of the investment as the variance of returns on stock, and the time value of money for the

risk free rate of return.

The required level of return on common stock portfolios should obviously be higher than the

risk free rate of return in the economy offered by the government securities.

In order to stimulate the economy and in the wake of declining inflation, SBP kept reducing the discount rate to encourage private sector credit, which otherwise was being invested in Treasury Bills earning a

risk free rate of return. Despite reduction in rates, banks are not actively advertising their products and still find comfort in risk free money market investments and the fact that customers will themselves approach banks to take advantage of low interest rates.

where: k - rate of return expected by capital donors and at the same time (from nonprofit organization perspective)--cost of financing capital rate, [k.sub.]-for cost rate of the equity, [k.sub.m]-for long term debt rate, [k.sub.ds]-for short term debt rate, [k.sub.m]-for average rate of return on typical investment on the market, [k.sub.RF]-for

risk free rate of return whose approximation is an average profitability of treasury bills in the country where the investment is made.

[R.sub.ft] = the

risk free rate of return at time t

In order to stimulate the economy and in the wake of declining inflation, SBP reduced the discount rate to encourage private sector credit which otherwise was being invested in Treasury Bills earning a

risk free rate of return. The current discount rate is 9.5 percent.