Learn and Master the Basics of Finance Your progress.
Well, complete Basics of Finance one and one where you master the fundamentals of finance and talk like a brawl in your time.
You will learn everything from gapless is raised to how investments are made. It has a very simple objective and that is to help you understand important concepts of finance. The aim is to give that level of expertise. We can start to make sense of things happening in the news and in the business world. The broad too had conquered the subject by understanding complex topics using simple and easy to understand concepts.
- The Origins Basics of Finance
- The Banking System
- The Fundamentals of Economics
- Understanding the Time Value of Money
- From Individuals to Corporations
- The Study of Corporate Finance
- Financial Products and Risk Management
- Mutual Funds
- Introduction to Derivatives
- Alternative Investments
- QnA on basics of finance
- Finance basics for beginners
- Types of finance
- What is finance
- Basics of finance pdf
- Basics of finance ppt
- Personal finance
- Basics of finance book
- Financial management
- What are the basic concepts of finance?
- What are the three areas of finance?
- How many types of finance are there?
- What are the functions of finance?
- What are the 5 basic accounting principles?
- What are the 4 principles of GAAP?
- What are the 4 areas of finance?
- What is the simple meaning of Finance?
- What is General Finance?
- Who is the father of finance?
- What are the four main areas of finance?
- Why is finance so important?
- What exactly is Finance?
- Why do we study finance?
- What is the difference between finance and accounting?
- What are the 4 types of financial institutions?
- What area of finance should I work in?
- What are the different branches of finance?
- What does GAAP stand for?
- What are GAAP rules?
- What are the 3 basic functions of a finance manager?
- What are the sources of finance?
- What is cost of capital in finance?
- What are the two main sources of financing?
- What is the capital?
- What are the topics in finance?
- What are the different types of finance?
- What are the five basic principles of finance?
- What do you mean by finance?
The concept here is that finance was born due to the need for humans to provide for themselves and their communities. You would then look at how much you got introduced into a DeLillo’s study that all end up in the banking system finances as incomplete.
We did a study of economics. We spend some time introducing you to the concepts about micro and macro economics. You would then take a bigger bosom of finance and introduce some more important concepts of money management.
Later on, we would scale up this concept to understand how companies function and hold the middle and our guidance.
From here we have a deep dive into the exciting world of corporate finance and learn how managers work towards increasing the value for the company for our shareholders.
We will look at products such as equities fixed income derivatives and many more Not all you would you be able to understand the subject well but also you would be able to connect the dots and perform your own analysis.
So you concede that there’s a lot of ground to. We know we have a long journey ahead but I am sure that could be a fun-filled and exciting one.
Finances are a very whilst yet exciting subject. Having said that to some misconceptions. I have met several students and professions who mentioned that finance is not the above.
I did believe that finance is all about numbers and high-level maths deficit numbers hence fewer finance.
We will dissect complex topics into really basic concepts. You start to appreciate the simple things that walk behind are only golf major corporations.
That brings me to my second point. Finance is not about googlies and high-level maths. If your field over some bodies topics did let me assure you that high level of maths is not required for most of the concepts in finance.
You need to be a maths wizard to understand finance and apply it if you can add subtract divide on what to play then most concepts of finance can be easily understood. Lastly finance is not a body to study spreadsheets.
No just good to get a grip on a spreadsheet-like you did not married you for you to master demp to get around the basics.
Remember spreadsheets are tools to help been performing calculations. You can still do addition with ugly dough. You just don’t understand spreadsheet bhumika laced likely easy.
The Origins Basics of Finance
The Barter System
In this section we would dig bigger the origins of finance. You start by understanding what the barter system is and how our ancestors used it as an effective trading mechanism.
Before we begin let’s go on a journey back in down to the very beginning of mankind which has starred Ben astounding the need for this field and why touches the lives of each individual. Many many years ago there were a handful of people living on this planet.
They had an abundance of food land and water. This allowed them to lead a very happy life. Unfortunately, teams too good dramatic down as you must begin to explore your surroundings.
This started growing in numbers as has happened. Dangerous also started dwindling and also a changing. You could no longer afford the freedom and the luxuries of life.
There were less resources in the hands of each individual. So the people started picking up so-called professions some became farmers while others became hunters.
New set of people were very happy and all lives. However soon do you realize that again not so why by themselves the hunters needed Greaves from the farmers and the farmers needed meat from the hunters to overcome this problem of needs in ones.
They devised a very simple system. They exceed the bags of grades for the bags of meat. The system was absolutely brilliant. It or give most of the inherent problems of early societies.
There was no concept of money just as goods or services in exchange for other goods or services. Think of it as buying a cell phone in exchange for 20 bags of rice. This early system of Drood GOOD primitive youm was the perfect solution to fulfill the basic needs and wants.
Do this do it. We see some we are into the barter system prevalent in our society associations such as the IRA do you. That is International Reciprocal Trade Association proactively adwar good to preserve protect and enhance the global botto industry.
Even though the war wodges the bartering don’t resemble the brain would do once it just did and ordered it a means of Druid’s system in a few countries harware as a use of currency has been introduced. Our modern day society barter system has been pushed aside for very specific or very limited uses only.
The Drawbacks of the Barter System
In deloss lecture we looked at how the barter system was developed as an efficient method to exchange excess produce the system was ingenious and walked when for several centuries when it went really Dean had no problems of distrust actually began to surface for barter to occur between two bodies.
Both need to how what you’re once this problem is called the double coincidence of wants. Think of a. If you have extra dough and bags of rice and want to knife one who’s dead. You must look for a person willing to sell his iPhone in exchange for rice. Finding such a billing person could take several months if not years.
Even if people have a surplus of goods division you sell nor trade will go. Says the put doesn’t shed buyer may lack anything needed by the seller or always a Wassaw.
Secondly, there are certain items that cannot be due I did a widow destroying its value be gone for instance have a Gwadar offer living gold in exchange for one liter of milk. And lastly there’s no common measure of value. What does one gold equal and rice in order to buy 10 bags of rice. Do I send one goat or two or maybe three.
With the passage of time, the number of Buttrick transactions increase. Many forward and the problems all started to become much was.
Introduction to Money
In this section, we will look at the basics of money in new directions. You would take a closer look and understand how money grew and in the modernness society and how was it controlled and so colluded in the economy for not being considerate on the basics and introduced money as a natural progression from the bartering days.
We saw some of the drawbacks of the barter system. One of the drawbacks was the need for a common measure of value as you once progressed started to specialize in different fields of work.
Not all you would the farmers in countries where there were borders and blacksmiths would increase in professions. There were more products for sale.
Also the need and demands for the people started growing soon arrived the need for the many buyers and the many sellers to meet. And one common place in order to grow your debt transactions This led to a setting off marketplaces where people would bring indexers produce to sell and also to buy other goods.
As the number of folks shoes goods increased the complexity of barter system increased. By now it had become absolutely necessary to define each product in dogs for commenting.
There was a need for a common medium of exchange something that was easy to change hands and yet desired by everyone. Some would argue I don’t use were bags of cedar green and livestock.
You eventually people started using specific commodities such as gold and silver which was due to easy to use and had value with the introduction of the medium of exchange. No the problem botto that as a double coincidence or once was sold.
Now goodbye your iPhone with a wedding for someone who would need your production done by definition. Money has a really big concept. Can a grain of rice be dumb as money or does it have to be something very specific.
You god must have come to define money as anything that fulfils four functions.
Number one: money should act as a medium of exchange just as we do in our everyday lives. Money should be used to buy or sell goods or services.
Number two: Money should be used as a way to postpone but chooses. Let’s go back to the body example. Assume you wanted to buy an iPhone for your body which is six months away to buy a phone. You find a willing seller who plans to buy tools and litres of milk from you.
Even though you may have an excess of bluebottles now six months down the line the milkweed gets point and its value will degrade to nothing. You simply cannot store its value when he saw his problem.
As long as currency is not experiencing rapid inflation hoarding rent in any form allows you to delude the put users of your new iPhone. Does bring us to are told point money should act as a means of payment. It can be used to be a big debt to people or entities from whom money has been borrowed.
Try doing that. We do what comes off mouk unutilized intricacy and finally when it should show up as a unit of gold in this last function.
When you serves as a standard of measurement by which his debts and payments can be conquered just as an inch or a centimetre can be used to measure lend a dollar or a euro as a unit for gonged to used to measure value.
When he was probably one of the most important ventures of mankind its introduction also led to the beginning of the early banking system or d’oyly.
Banks were crude and limited in their operations or were dymes delmont and loved other functions and have now become residence structures of the modern day economy.
The Banking System
The Origins of the Banking System
Indignation is a banking banks with nothing but informal structures created to solve some newly created problems as trading add to a deep increase.
Many studies accumulate in the hands of the tradesmen. There was a need to keep this money in a safe and secure place.
Unfortunately, ancient horses do not have the facility to store money in a safe and secure manner so people don’t trade temples which were considered to be safe more or what the breeze was considered, to be honest. Adding a sense of security.
This started a trend where most wealthy people had accounts with dimples and deposited their money as money started to pour in. The bullies decided to lend them to the farmers and the merchants who were in need to start a new hire West or enter into a new trade.
Such laws often demanded some extra beam and in addition to the money lent out this extra repayment is called interest and is associated in some way odd year though with almost all loans given Not in today’s world.
The audit done money lent out disturb and less principle to get the principal and that interest had to be returned to the temple after a defined beta of time. Is a tenure of the loan.
With this, the Billies of modern-day finance have constructed these churches were led to formalized and newly created banks act aggressive deposits deposited and lent out money and all acted as conduits between the people with SS money and the people who were the demand for money. In this process, the interest charged from the borrowers would be to the ordinary depositors.
After deducting some fees so as to mehndi in the base operations did it as did banks provide discord function and many more. The next you look at the key functions of banks and their importance in the financial world.
Functions of a Bank
As seen in the last lesson one of the most important draws of a bank is to accumulate gupton and provide loans it serves as an intermediary between the savers also known as lenders and the borrowers.
Let’s look at us from a more India perspective where people earn money do not use it. All of this set aside excess can keep us excess money under the pillows or the can lend it out to people in order to earn interest unlisted a specific need.
Most people prefer the latter. There are many ways to lend out money one directly abroad to borrow or they can lend to an intermediate body once your body is a bank there are many more such bodies before just less than we will focus on banks
People who lend money through banks, net savers. In exchange, the bank brings them a fee in the form of interest.
The bank pooled all the money collected from various customers and don’t lend it to other individuals wishing to borrow money in exchange for this loan. The bank charges interest from them.
This is a win-win situation for all the parties involved with the bank. The lender would have to search for people in need for money and the borrower would have to find someone willing to lend them the exact amount of money needed in the bank to interest charge from the borrower is a major source of revenue.
All it has to ensure is that the interest it owns should exceed the interest it pays out. Looking at this it meseems and banks would all be profitable.
This is a good time to introduce a concept of risk as zouma situation with the borrowed money from the bank and fears to bid that interest or the principal back
Such a situation is termed as default in such a case. The bank would bear the loss and would have to dip into their reserves to make up the loss. If these losses keep carrying the bank would be unable to be a saver and hence would be declared bankrupt.
In such a process the seat was would end up losing their money. This risk system does credit risk and in not at all why does tuition banks follow true guiding principles from various struggling glittery bodies.
These bodies act as watchdogs to ensure the banks don’t take on unnecessary risk. Dead to ensure that the banking function works smoothly and the confidence is always present in the banking industry.
Types of Banks
Banks evolve over time to perform specific functions for declines. Some banks are undifferentiated on the types of clients while others are different.
The types of products they offer. In today’s world, we may be fined for dope’s or banks. We had a redeal bank. This is our everyday bank where we go to deposit our savings.
These banks normally did what swollen glands do offer products such as savings or checking to make deposits and loans against to borrow money.
Besides this deal to provide credit cards which is another way of lending money. We also have private banks.
These banks give to the rich and the superrich glands the off wonder for do us high net worth individuals and ultra-high net worth individuals like everyone else did.
You need to make deposits and take out loans. However, the immediate concern is managing wealth. Private banks lend a helping hand by means of a boson less relationship manager whose main job is to increase and manage to a vote of clients.
DiMaggio says the glowing specialized products dealer made for the specific needs. By offering these services. Broward banks own most of their revenue from fees.
Another type of bank as a corporate bank is also known as commercial banks D bank specifically deal with deposits and loan services provided to corporations are large or mid-sized businesses.
What Brit clients Bramley acquired a facility to make and receive payments due to need would short term and long term loans to manage payments and buy equipment own machines or big banks exist had these businesses and provide them with these types of loans in return.
They charge interest and fees which are the primary sources of revenue. The 40 billion is an investment bank. These banks did largely been this is or institutions advise businesses on how to make long term investments that are managed by the bank.
Sister injuries and capital from various types of lenders the auto companies and merging with or acquiring other companies. Besides the type of clients banks also differentiate on geographical focus.
The name differs from country to country but can be broadly classified as dris Trick banks sted banks national banks or international banks.
What type of national bank is a central bank. This is a bank that provides financial and banking services for its country’s government.
Does bankers also responsible for implementing government policies on printing money and do moving money from the financial system or to regulate and supervise other banks in the financial system.
Some examples of the central bank the Federal Reserve or the Fed in the U.S. the European Central Bank the ECB in the eurozone and the Bank of England in the United Kingdom.
Banks are all two different shoojit on the basis of legal structure and size. But I believe that as an exercise for you do explore.
We have seen the function of a bank as gone to a draft of money from surplus areas to the deficit. Yes, you are brittle function.
We need to maintain the status and trust among the companies and individuals. If confidence is lost in the banking system savers and investors would stop depositing debt excess money into a bank.
This surplus will no longer be available for the use of corporations which will cease production due to lack of funds. Once this happens the governments taxes would fall leading to fewer funds of Libya for bideford of the society.
We don’t any benefits in doing so you would no longer be. Do you wish to work as hard was in order. Excess funds to dry up vidot in the US funds nothing would be deposited in the bank.
This vicious circle is a very real situation became very close to such a situation. You really do cause an age credit crisis. Money had dried up and only rich for corporations did on credit. Why are the government’s actions to pump money into the system.
You could see how important the function of a bank is. Another thing to keep in mind is for contagion.
Banks are very susceptible to such a situation. Since banks are interlinked. The collapse of one bank may lead to the collapse of others leading to a four in the confidence in the banking industry as a whole.
So you can see anything done in bodhran and cannot be left to operate by themselves. There has to be serious rules checks and guidelines to monitor the functioning of banks.
The banks not all you fall under the governing laws of the state but also have to in certain policies that have to be followed depending on the region of operation the body laying on these guidelines and policies is known as a regulator.
The aim is to create market transparency between banking institutions individuals and corporations. Some examples of guidelines set forth by the regulators are as follows. Number one capital requirements the banks cannot lend on all of its money.
Even the lending is profitable for a bank. There could be a situation very urgent capital is required. Has the bank needs to hold on to some funds.
These norms are laid on by the boss and committee in Switzerland to ensure the banks continue to finance it from big ag to Android. No. Do restrictions to large exposures does a rare launch seeing in the finance world.
Don’t put all your eggs into one basket is a bank lents all its money to one company and that company ends bankrupt didn’t die and money is lost. So the banks need to spread out their investments so they should lend to different types of people and different types of companies.
The third one has regulations regarding financial reporting down to Dime bank should report to our needs and expenses. This would help raise warning signs in time and do active actions could be dechen.
Besides these there are few guidelines and do so by the country’s central bank. To sum up the section we saw how money was created as a need to simplify barter transactions. However this soon arise a need to protect the newly created money which led to the creation of banks.
Banks used to practice on borrowing and lending money effectively to earn and give off interest. The difference of the interest earned and interest given out had them in becoming profitable institutions.
However practices of lending and borrowing need discipline in discipline lending can lead to failure of the banking system and hence the need for regulators and central banks to keep a watchful eye on the next lecture.
Have a look at the real case example of a particular bank. This gives you Lacey some of the importance of banks and how undisciplined lending can lead to the collapse of the entire system.
Case Study: Collapse of a Bank
Lehman was a 150 year old bank with a great history and an excellent brand value. It was an investment bank created in 1850 and ran successfully for many years from 1850 to the year 2000.
Eight Lehman Brothers see too many crisis’s. There was a great depression. The doom war was the Russian debt crisis and the 9/11 attacks. The list just goes on.
He managed to survive all of these and yet remain profitable in fact won several awards and it was among the top investment banks in the world. During 2003 to 2006. Many banks had stepped up their lending program since lending was profitable.
During this time did increase the amount of loans given to unworded borrowers many borrowers had butches more than one house as getting a loan was fairly easy.
These laws were done as subprime mortgages due to the fact that they were given to customers. But look course this business was very profitable.
As interest rates were slightly higher as a banks were receiving timely payments due to the growth of the caused market. The subprime borrowers would normally sell a house and rebid their lawn and dig another lawn at a lower rate of interest.
Was done six. Everything changed. The housing market started to fall drastically and these subprime borrowers could no longer be off their lawns. Since banks had to pay interest to us borrowers had to dip into the reserves to make good debt obligations.
As the number of defaults increase the reserves got depleted and finally Dad took closed on the business. I looked towards the goffman for free money. This situation is going to be long in the financial world.
This is exactly what happened in the case of Lehman did defaulted on the obligations and had to file for bankruptcy in 2008. It was not just Lehman but also other major banks such as Bear Stearns and Morgan Stanley were badly affected.
There was no money left to lend out to corporations. This negatively affected the production and cause growth in the economy to slow down drastically negative growth for two consecutive quarters this term because of recession.
The beta of 2007 to 2009 saw one of the Watts recessions due to lending malpractices. So you can see money lent without proper background checks can not just lead to the failure of a bank but a grand cause of failure for an entire system.
This also brings on the importance of regulators before the crisis. Not enough regulation to check such lending malpractices was the crisis.
Things have changed drastically. Banks have become smarter and regulators have become stricter. This is obviously necessary and have a moral importance to such crisis as from happening again.
The Fundamentals of Economics
Basics of Economics
It is a right time to jump into an exciting world of economics to fully appreciate the concepts of finance at least a basic understanding of offic non-mixed is absolutely necessary.
No don’t worry too much here. Economics may be a beautiful study of complicated graphs and debates but more specifically it is a study of what constitutes rational human behaviour.
Adam Smith also known as the father of fiction Comics has tried to define what goes Stewart’s rational decisions and how would affect the larger society. He has gone out to understand why some nations prospered while others lagged behind in poverty.
The job of The Economist is to understand how what do we do. And nations behave when there are certain constraints imposed upon them.
They would ask questions such as Given all the choices. Why did John use his ten dollars to buy a movie dickered instead of a sandwich. Or maybe Johns to buy that movie did good. If its prices draws to 20 dollars in real life human being is very complex.
So in order to simplify things economists make certain assumptions. The first one is that human beings will aim to fulfil their self interests.
It also is used at individuals in their efforts to fulfil the unlimited needs and wants will always be here rationally. So to sum up economics is a social science. It examines how rational people behave in order to fulfil their self-interest.
Given the scarce resources and unlimited needs and wants in broad terms non-mixed can be divided into two streams. One does micro economics and the other is macro economics. Going by the name Microeconomics is small things such as how people make decisions to look good the scarce resource scarce resource.
You are referring to resources that are less in number such as money time Libra and illis just goes on giving in finite time money and labour. You could all look good and inefficiently and yet maximize production.
However given that such resources are scarce How would a company or a nation. I look at DG sources to maximize production and yet remain profitable.
Macroeconomics on the other hand looks at the bigger picture when order smaller barter summed up how would all the aggregate decision affect the economy.
Let’s look at an example. If for some reason or the workers decide to stop working there would be a production crisis not just at a micro level but also at a larger level macro economic analysts. News video issues and answer questions such as what policy should the government adopt in such a situation.
Should have reduced taxes or simply should have give away free money. Micro and Macro Economics are intertwined. A change in macro economic policies will affect the many microeconomic underlying transactions.
Also, a change in my good economic decisions will add up in dadgad good sense to impact macroeconomic decisions. Hence it is embodied solely board to streams and understanding into dependence.
Microeconomics: Demand and Supply
The study of demand of supply is perhaps one of the most fundamental concepts of economics. It is such a simple concept and yet it forms the backbone of the glomming system.
Demander if as do harm much quantity of a product or service is demanded by a bio given a certain price sublight on the other hand differs to how much cornering you are for a product or a service where sellers are willing to sell given a certain price.
Price has therefore reflection of both supply and demand to understand as Fordo let us take a closer look at the law of demand and a lot of supply. The loftin wants to insert assuming all other factors such as income remain the same the higher the price or for Good the less of a demand. The cost is also true assuming all other factors remain the same.
The Lord the price of a good higher will be the demand. This has fairly into it. Well dume you wanted to buy a box of chocolates. Jerry price had 20 dollars. For some reason the price drops to one dollar one night.
Would you buy one box or to buy a few more bottles for your family and friends on you then hand you that the bride had the roof for a hundred dollars a box. Would you still be interested in the produce.
Let some riders in a diebler form representing does GraphicLy gives a nice dunwoodie LOOK Bingo. Wanting to remember you had a strict convention. We always put the price on the board to galactose and quantity on the horizontal axis.
One we do remember this is that since be gods before you in the forbidden sequence price would be written to the left of the quantity just like the job demand. The law’s applied demonstrative quantity that would be sold at a certain price.
Well assuming all of the fact does remain the same the higher the price of a good higher would be to supply the can was also true of zooming all of the factors remained the same. The Lord the price of for good.
The law would we the supply going back with the box of chocolate example. Well you yourself to be the manufacture of chocolates. One box of chocolates costs you a certain amount to produce and hence you said the price of 20 dollars a box.
As you for some reason the price of the chocolate falls to ten dollars. Would you still be willing to sell. If you’re making a loss you’d like to sell fewer boxers than what you would have if the price was 20 dollars not the price that you took two hundred dollars.
You’d make a huge profit and would like to send a maximum number of boxes. Let some radison a double off. This is the exact opposite situation to what we saw in case of demand representing us graphically gives a nice puts leppink of the convention is applicable here.
To to put price on the what looked like suits and quantity on the horizontal axis. Now having seen the two goes you can make an intelligent guess that the door remains static in the world around us braces do rise and fall.
And with this, the quantity demanded and supply change. Such changes result in movement of the two coves. Nor is it important to understand and distinguish between a movement along with a given demand or supply of ownership in the kovats. But a change in market prices do simply increases or decreases the quantity supplied or demanded is represented by a movement along the Gulf.
Now let’s look at an example. Prices of chocolates increases from 20 dollars to 50 dollars. The demand would reduce when the supply would increase. This type of movement happens along the Gulf. The govt does not shift and remains the same.
However a change in really but I didn’t price will result in a ship for the overturn. So changing really both could be things like income lifestyle or simply the changes in price or related goods. Now let’s see an example.
The prices remain the same at 20 dollars but just salary increases. Would you demand the same quantity or would you demand increase. As expected the demand would increase at all price points.
That is if you were demanding 10 units at a price of ten dollars a day might would increase to 15 units. The same would happen at a price of 20 dollars and a dodgy dollars. This type of woman was she had the demonic off to the right and there had been you go up in place of the old one.
Similarly gingered in the circumstances of the cellar. Would she have a supply of unmuted reduction the costs of production would allow you to supply more quantity at each price point. This would shift the supply go to the right. Movements and ships happen in the economy. It is fairly into a dive to analyze situations to understand any outcome.
Just put yourself into the shoes of the buyer or seller and use your common sense. So far we have seen the buyer and the seller in isolation. However buyers and sellers are part of the same economy for any true do so it has to be a match between the two.
The price of the goods has set too high. The seller tried to sell all of his goods but that would not be possible. You do the lack of demand when you’re there. Hand if the prices are said too low the buyer will not be able to find a product in the market you do short supply.
Only difference in price will cause the market forces to push the price towards an equilibrium. In either case, the price would have to be adjusted to get a match just price is called the equilibrium price and it has a price at which the demand curve intersects the supply of the quandary you demanded and the price would equal to the quantity supplied thus squandered used for two other equilibrium quantity.
Under does shindand BIOS compete for available goods on the basis of price only at top players compete forsee it on the basis of prices. Market forces would always drive the prices to a two equilibrium level.
Price Elasticity of Demand
We saw hog wanted demanded a response to a change in price to price elasticity is a measure of distrust pods of nyström the change in price.
In simple terms it is an issue that puts into change in quantity demanded to put into juliane price as the price of chocolate to increase by 10 percent from 20 dollars to twenty two dollars and that of our to increase by the same 10 percent from 10 dollars to 11 dollars if the demand for chocolate and outputs decreased by don’t percent and 5 percent respectively.
You lost a suit you don’t want four chocolates would be gagner. As one of our boats. It would be point five. This suggests a higher responsiveness in gift of chocolates. When the quandary demanded is a very responsive to a change in price.
We see that the demand is elastic whereas when the quadri demanded is not really responsiveness does a change in price. We see that the demand is inelastic elasticity as you do you just call us perfectly inelastic demand does happens when the demand does not change at all.
We have change in price. It is also possible if didymus more important than the brazed does not matter. This happened in case of lifesaving drugs. On the other end of the spectrum we see the Dow falling to zero for the slightest increase in price.
Such a case is called pathetically elastic demand to succeed in goods which have perfect substitutes for example. If the price of one brand of chocolate increases the price of a similar dissing chocolate tree is a sin. The people who would buy the latter and a demand for the former would drop.
As you know the reason why we need to study DOS is to understand human behaviour and how people react to price changes.
If you recall comics mix of study of rational human behaviour we need to understand the bigger picture and answer questions such as how would their loan just should be affected by a brace change or have they lost as a demand for coffee is one and out of use den.
Which industry would be more profitable if the price of woodberry does increase by Dent percent before we move to the next topic.
Spend some time to understand the demand and supply golf see hold your religion and hold prices and external factors affect the Gulf. This topic was simple and yet very important be the stock market or the food market.
You can see the interplay of demand of supply on most every pleased in the economy in the next hour. You’ve jumped to macro economics in order to understand a bigger picture. Introduction to Macroeconomics income and costs.
When we sum up all that individuals in the economy we arrive at how all the players will act together as a whole. Macroeconomics is a branch of economics that studies how the aggregate economy behaves.
It focuses on trends in the economy and wholly gone memos as a whole. One of the most widely used measure of the economy is the gross domestic product. It is measured as a door to market value of all goods and services produced in a country within a specific period of time.
It should be clearly understood that gross domestic product or GDP only includes goods and services produced by a country. I don’t mean from abroad or items that would be used in production for other goods will not be included in the calculation.
There are two approaches to agree the GDP. One is called the expenditure method and the other is called The ingomar Method. Calculating GDP by adding up expenditures scored the expenditure approach and computing GDP by examining income for resources is known as resource cost or income abroad.
For the sake of simplicity we have like look at the expenditure method for calculating GDP in a more simple form. GDP is a sum off four factors. The first one is consumer spending. That is a money spend by individuals to buy goods and services.
For example food clothing rent etc.. The segment is business investment. That is a point it is made by businesses towards equipments and inventories. The tone is government bhajis as these would include salaries are public servants.
But you do as military weapons etc.. The for dummies are net exporters. It basically subtracts your imports from their exports to get the net figure. No matter the matter is also a simple addition but the components are different. You believed this as an exercise for you to look up.
Don’t get too bogged down by the details on the form. Just be aware of the domes and how they are used in the form LA. What are the key terms you’ll often read in the news is nominal and real GDP.
The main difference between nominee and really values is a tree and values are adjusted for inflation.
Why nominal values are not as it has out nominal GDP but often a bit higher than the real GDP. If you look at inflation in more Delinda were fine let’s look at the definition. Inflation is a sustained increase in the general price levels of goods and services indeed gone me over a period of time.
Having said that we need to understand what inflation does. Consider a simple example as you asked to be the only product produced by a country. In 2015 a country produces only 100 cars with the price of hundred dollars each.
The GDP could be calculated as a total market value at dentals in dollars. If the country produces the same hundred cars in two done 16 with the same price to GDP the lot change over. If there’s an inflation of 10 percent and the price of a car increases from hundred dollars to 110 dollars the GDP increases by 10 percent.
This higher GDP due to inflation is termed as nominal GDP. Adjusting for inflation the real GDP is only dentals in dollars.
It is prudent to understand the difference while comparing the growth of GDP from one year to another. One must question how much of it was due to inflation.
If a country cities grew 5 percent year on year in nominal dommes but inflation was 2 percent they really draw D all year on 3 percent while reading the news. Be cautious of these terms and tried to comprehend the difference between nominal and real GDP.
Inflation is defined as a sustained increase in junior price levels of goods and services in the economy. Order beer of game.
It is important to note the word sustained does suggest that a certain swing in prices is not termed as inflation. Inflation means goods and services costly with the passage of time. Are you drift off currency would be able to buy fewer goods and services.
Inflation is measured in percentage terms and indicates how much the price has increase of general goods and services. For example an inflation of 10 percent means average prices of goods and services has gone up by 10 percent. Which is more doing what it does.
Let’s look at what causes it like we saw before. There are two major reasons for inflation. The first one is driven by demand. And the second one is caused by the change in supply.
It is widely believed that inflation is caused when there is excessive growth of money in the economy with an excess of money in the system is too much money choosing too few goods to understand this.
Let’s we did the demander supply of that we started in microeconomics. If you recall we started a juniors in external factors such as income can increase your disposable income and can allow you to buy more productive to produce lower price.
Does shift to do montgolfier to ride from. Do you want to do and hence the group in price was hired from B want to be do on an aggregate level increase in price is a basic principle. Be an inflation not an increase in disposable income is the result of grote. This happens when the nation is prospering and money supply has increased.
Did you do higher production or due to foreign investments. Inflation orders are good when the supply of commodities reduces increases the level of demand of the commodity prices move up such as changing supply.
This term goes negative supply shock supply shocks can be created by unexpected events that constrained output or disrupt the supply chain.
Such events include but not limited to natural disasters and acts of war or terrorism. We can see the effect of demand and supply of when the supply of shift to the left. That is a supply has reduced. When one moves to us to dig we have embraced junious from B want to be do on an aggregate level does increase in price.
Is inflation due to supply shocks in order to control such situations. And what do you have several policies in order to control the money supply the next lecture. We look at two main types of policies and how the government controls money and at the same time tries to meet its macroeconomic objectives.
The Monetary and Fiscal Policy
As we saw under Last Lecture the government intervenes from time to time in order to control the amount of money in circulation.
It does so may affect their going to good demand and they’re going to get supply. Before we move forward imagine a situation that happened back in 2008. There was a major crisis in the U.S. to which banks stopped giving loans to companies.
Now if there’s no money in the hands of the producer in production we take a major hit the taxes would fall and the economy will slow down considerably. Imagine this happening to all the major industries in the country in such a situation.
Stop for a second and think for a while. Should the government increase the money supply or should adriel Use it for the. Looking at an analogy. If a river is running dry should ever be made to increase the levels or should it be reduced further.
If you have guessed right the government should make efforts to increase the supply so that they got meudon smugly in order to meet the objectives.
The God would use tools such as the monetary and fiscal policy to monitory policy deficit to the central banks action that affects Facebook quandary of Bonnie and economy.
The main objective of the US policy is to control the interest and inflation rates. The monetary policy said to be expansionary when the central bank increases the quantity of money in the economy. Conversely when the central bank is decreasing the quantity of money the moradi policy is said to be contractionary.
The second policy is a fiscal policy dreadfuls who the goal must use our spending and taxation. We know that the government levies taxes in the form of direct and indirect taxes in order to spend money on the benefit of the public.
The main objective is to increase Zagat good or put off the economy for good. As you said to be expansionary when the government in Greece does its spending and reduces the taxes going mostly when the go moderate use of spending and increases its taxes.
The policy said to be contractionary would the monetary and a as good policy are used by policymakers with the goal of doing stupid prices and producing positive economic growth. Now we briefly discussed money in the previous sections.
Let’s revisit that concept and see how many is created in the economy in the early stages of modern money devlopment Coston was deposited gauld with dodgy bankers and were issued a promissory note and had done distort was not doing what a promise does a bank would return the gold back to the lender when demanded.
As time progressed these promising Nords became a medium of exchange. With the number of gold deposits increasing the bank has started lending the deposits in return for interest would haul a portion of the deposit and lend the rest to people who need the deposit that cannot be lent out.
Is called the reserve a moment and is determined by the central bank. This can be adjusted by policy makers in order to increase or decrease the money in circulation. It is one of the do that the government used to control the supply of money in the economy.
Read the warranty policy. The government can implement three major policies. The first one is who did to my policy rates in most countries.
Banks borrow money from the central bank in order to me the reserve levels for example if a bank has lent or too much money it would have to borrow funds from the Central Bank and other banks in order to meet its temporary shortfall.
In the U.S. the rate at which banks can borrow is those from the Fed is done bear the discount rate. Similarly for the European Central Bank or the ECB the shrewdest termeer the refinancing great.
Like any of the lending the Central Bank and other banks which are the boring bank or root of interest does interest rate is said by the Central Bank higher interest rate delore would be the money borrowed by the bank and hence nor would be the money lender to the people.
This would lead to less money in circulation. The opposite is true if the industry to set low. Your friend must have heard the news. The central banks have increased decreased or left the policy rates unchanged.
This is often done to meet the money supply objective. The second method under the monetary policy is to modify ideas of percent as discussed earlier. Where reduction ended is 0 percent means more funds are available to be lent out it’s time to.
The government reduces the percentage. If he wants more money to be lent in the economy the total of the most popular method used by the government is to engage in open market operations.
This simply means that the government uses its funds to buy or sell securities from the banks and other investors not buying securities from the bank will transfer the money into the hands of the bank and had.
This money would be used to be lent out and increase the money supply. On the other hand if the government would like to reduce the money supply it was selling securities to banks and investors. The sticky money away from the hands.
In recent years we have seen. Would the U.S. Fed and the European government engage in something no and just wanted to do easing.
This happens when the interest rates are news you do and cannot be reduced Furdo to make matters worse despite letters of per cent don’t give their money and stop lending out.
The government has no other choice but to use this medicine in order to stimulate the economy which is long term Treasury bonds and other securities to Bob money into the economy.
The idea is to give money to the producers so that the engines of the economy are not affected. This is totally different from open market operations where the government buys or says short term Treasury bonds.
When the other hand is appointed judge of easing the government uses as funds to buy or sell long term Treasury bonds. This has in effect saying now the government is boring or lending money for a longer period of time.
Now let’s look at the second policy fiscal policy idea as to the God must use spending and taxation to meet macroeconomic goals I discussed earlier.
The government digs taxes in order to spend for the benefit of the society it spends on making goods big bucks and other things that benefit the larger society.
Government’s budget is said to be balanced when the tax revenue equal to the government’s expenditure. A budget surplus has been the goal of moustakas Revenue exceeds the expenditure.
A budget deficit because when the government’s expenditure exceeds just tax it over in you know based on the government’s objective the budget can either be balanced in surplus or in deficit. They will.
The fiscal policy is to influence the level of economic activity and aggregate demand. By creating different tax Labs it tries to redistribute income among the richest section of society and last few aims to allocate resources more economic agents and sectors in the economy. Now the government can use what the policy in different ways.
Why do policy and the fiscal policy may be expansionary or contractionary for dinner for possible scenarios. The first scenario that of expansionary fiscal and monetary policy. In this case the impact will be highly expansionary. Interest rates would be lower.
You did the monetary policy and the private and public sectors would expand. You did a lower taxes and highest spending. In a contraction fiscal and monetary policy the aggregate demand and the GDP would be law.
You did a contraction any monitory policy. The interest rates would be higher and the private and public sectors would contract due to Lord whoring. The total now is a combination of an expansionary fiscal policy and a contractionary monetary policy. In this case you could have good policy. The aggregate demand would likely be higher.
However you do the right monetary policy the interest rate will also be higher. Does government spending as a proportion of GDP will increase. The last combination is that of a contraction it’s good policy and an expansion in monitory policy.
In this case interest rates will fall to the degree of government borrowing and from the expansion on the money supply. Government spending will decrease.
You did a contractually for good policy. The private sector would however grow as a result of lower interest rates. The government often scans the economy and uses these policies carefully for all types of fiscal stimulus. The impact has grew when the fiscal actions are gone by with an expansion in monetary policy.
This may reflect the impact of inflation falling interest rates and there is an increase in business investment in the ledger. We have a look at a business cycle and see how the government reacts to economic changes.
The economy is in a constant state of flux. There are times when all is going well and there are times when there is nothing but gloom and despair.
Such changes in the economy our drive by business cycles in order to measure the level of actor we be gone and must use the gross domestic product GDP and the rate of unemployment as Cuba both ability to mine the growing fears of the cycle.
A business cycle is characterized by four officers. The first is expansionary phase in this phase. We feel a level of fraud around us. The Rio GDP is increasing employment is increasing and consumer spending is picking up.
With so much growth around us we see inflation rates rise in the next phase. We see the GDP growth picking out the same thing happens with employment rate and consumer spending at this stage the inflation rate continues to climb.
After the big visas or war we see a decline in GDP unemployment rate increases and consumer spending gradually declines. This phase is known as a recession indexing could a recession is known as a bedient where the GDP has declined for two consecutive quarters.
In this phase the business and consumer spending drastically reduces. We also see inflation start to reduce and we often see the government changing their monetary policy in order to induce growth in the final phase.
We see a trough in this phase the bottom as head and growth begins to pick up. The rate of decline of inflation reduces and Azaad dying for business and consumer spending to stop producing and start increasing. With this fears we go back to the expansionary phase and really need to cycle again and again as we saw the recession.
A common rule of thumb is to consider two consecutive quarters of growth in real GDP as a beginning of an expansion. It must be understood such batten’s zone at dreg slow endures. Some fears last longer than others and some say last longer than others. It has been seen in recent years then aside goods have become longer.
The last recession of 2007 lasted for almost two years and saw brierwood consumption fall for the first time in nearly 20 years.
This indicates the depth and security of growth and recession with consumer confidence or low recovery digs a long time. The National Bureau of Economic Research announced on September 2 does the den. Darden Servant do it all the time the recession that ended in June 2009 was a long recession since World War 2.
With this we conclude our section on economics. The best way to understand all of this is to start reading the financial news.
The news is full of economic events. Some countries are changing their policies while others are battling recession. Read two such articles with an inquisitive mind and tried to decipher the implications and how should the government act in the next section.
We have to dig a deep dive into the world of quantitative finance and dig a look at the dying value of money. But before we leave dissection Let’s have a look at Doody life case donees.
Case Study: Demand and Supply of Crude Oil
During the beta dotted five to 2013 the production of crude oil barely increased. However during this beta and some other emerging economies of the world were growing rapidly.
An ingredient brought him an increase in demand for energy. China one of the media importers of crude oil increases consumption at a large base. You did demand raising so much more than supply the prices of crude oil jumped during 2005 to do it was an 8.
Do tell us in. The price of crude oil was around 50 dollars a barrel. Increased to nineteen dollars a barrel in 2007 before shooting up to 140 dollars a barrel in 2008. The strides in price was due to a combination of high demand and reduced supply. During two times and it does husayn 9 the price of oil fell sharply to thirty two dollars.
This was mainly due to reduce demand in Europe and the news of increase supply. After bottoming out both to Tosin 9 the price to rise again. This was attributed to the increase in global demand plus recession distress continued deal about two Tosin codine when the price reached hundred dollars a barrel. In 2014 there were beetroots of social political dermoid.
There were issues in Ukraine and the Middle East. This led to fears in supply cuts. The prices rose temporarily due to this dermoid and began to fall. Supplies started to increase and global demand for crude started falling. During 2014 most oil producing nations stepped up the supply for oil.
In June it was all and 14 advancements in the technology for extracting shit oil led to an increase in U.S. oil production. This got built with the reduction in China and Europe’s demand led to the Don for in price for crude oil.
Drita don 15 to 2016 the price continued to fall hitting rock bottom at twenty seven dollars a barrel. Well Beck and other major oil producers decided to cooperate and reduce oil production. Stat prices began to rise and he crossed 40 dollars a barrel.
So you can see a life example of demand and supply in blee the case explains a concept really well when demand outstrips supply prices will raise the boards they destroy. When supply outstrips demand.
We see demand and supply believe a major at all in setting prices for most things around us. If you’re curious search the news for stock prices and try to analyze why the price has jumped around.
This would be an interesting exercise to clarify the concept to make things more clear. Ruby dicks a size for braces for other commodities and appreciate the interplay of demand and supply.
Case Study: The 2008 Financial Crisis
The most glassell example of macro economics in action comes from the actions of the U.S. government during the 2008 economic crisis.
2006 the U.S. housing market was doing really well. People investing in houses were able to go to good return on their investments was done six.
The market beat and in 2007 it started to decline. Banks and financial institutions had expected the housing market to have been strong and had invested heavily in products that were linked to this market. With the decline in the housing market these drugs started to God’s heavy losses facing such losses.
The banks decided to deduce to lending certain years you know leivers the situation as deemed as liquidity crunch with no money being lent out the Corporations and businesses that relied on banks for money reduced their production and started making losses started reducing their costs by firing their employees.
You did the fear for unemployment the consumers do reduce their spending. This marked the beginning of a recession a beaded of economic decline. If you had gone from the lecture on monetary policy the government must intervene and junious policy.
The idea is to increase production we could start the growth engine in order to do so. The government must increase the supply of money in the economy with more money. The corporations could resume production and consumers going to resume spending in the monetary policy.
The government believes are on with interest rates it really wants to increase money supply. It should reduce interest rates.
Thus in 2008 the U.S. central bank resorted to the traditional manner of implementing the monitory policy by lowering short term interest rates short term interest rates referenda interest rates levied for borrowing for a short period of time.
This helps banks borrow funds for a short period of time at a very low rate of interest. More money with the banks more money would be lent out and liquidity was restored in the gone.
I know Metro News was pumping money directly in the hands of the banks. If you recall the government also based Treasury bonds in order to borrow money into the economy. Using these going to mention Dools and the beginning of the crisis the U.S.
Fed pushed just short term policy rates to really low levels. As a result there it’s Game 2 on mosiello percent with the head of this intervention the engines on the economy revived.
Business has made a turnaround and growth resumed. So this gear summarizes what freestone in macroeconomics and sees the traditional actions of the government during a crisis.
Understanding the Time Value of Money
The Time Value of Money
If you’ll recall from the section on banking money can be led o doing do you. And corporations do receive interest and are done. This is the core principle behind be down value of money in a very simple language it says given the choice between receiving ten dollars now or receiving denned dollars in one year
Or it was preffered to receive the money. Now because this money can be lent out to receive interest. This is the most basic and most important concept in finance. Money is just said to have a value attached to itself and money you see today is more valuable than money received tomorrow. Having said that let’s look at interest in a bit more detail.
We have seen the concept of interest before looking at it from a lender’s perspective. It is the extra money you receive. You lend your money to someone. Let’s read another example of a bank. When you deposit your money with the bank you become the lender and a bank acts as a borrower. You as a lender would receive interest in return from the bank.
Now looking at it from a borers perspective it has the extra money in mind that you have to be when you borrow money from someone. If your friend decides to buy a new bike he would normally approach a bank in this situation.
He becomes the borrower and the bank becomes a lender. No a friend can approach you directly. Assuming you have the money to lend him you and your friend can come up with an agreement where he would be you back your money and some interest after a certain period of time whichever way you see it.
The lender is due to receive interest and the borrower is liable to be interest. No the question arises. How was entrusted to mind. The answer is interest as determined by something called an interest rate.
Interest rates are defined in percentage terms. For example we can have 1 percent 2 percent 3 percent etc.
The interest amount is determined by simply multiplying the interest rate and the Treasury money lent or borrowed this money lent or borrowed is just principle. So if you borrow 200 dollars for one year and the anvil interest rate is 5 percent you will have to be back in one year.
Do you hundred dollar principal and 5 percent of hundred dollars. That is five dollars as interest making that took off hundred and five dollars. Higher interest rate higher would be interest amount. Interest rates play a very important role in the financial world.
It decides how money flows to the economy. If the interest rate for an automobile loan is very high your friend may decide to death for his budgies and lend whatever savings he has to a bank in order to earn interest not only at an individual level it also affects how large companies operate.
If the interest rate for borrowing is too high. Government has made good use borrowing and production will take a hit. If on the other hand interest rates are too low the lenders may decide not to lend their money out as it may have better options available.
Does production will take a big hit simply due to lack of funds. So there has to be a trade-off. That is a win win situation where interest rates are needs said too high not debt said to law. Understanding the interest see is willowby redig gotten me and gidge 8 years off opportunities for example.
Oh you mean that the economy is generally doing well. Housing prices are low and the housing loan interest rates are all too low it makes a lot of sense to take a housing loan and buy a nice house. Similarly if you read in the news that banks have reduced interest rates for automobiles you can expect to see ads of cars and bikes to go up significantly.
So as an exercise try to look out for interest rates and the news and guess how it would in bagged the floor money it would be an interesting exercise and would also get you started the newspapers. Even if you don’t understand most of the news it is fine.
Just concentrate on questions such as been lowering interest rates. Boost the economy. Why is it needed and how would it affect the future course of action or for bodies in war. Good luck in this exercise. I’m sure it would be fun and exciting in the next lecture. You have a look at how interest amount is going gluten in the real world.
Calculating Interest Amount
I hope you enjoy dexa say from the previous lesson. Continue reading the financial news. Gradually a lot start making sense and become second nature at this stage. It is a good idea to revisit Holp interesting equally true and there are two basic metrics.
The first one is called simple interest. And the second one is refered to was combined interest as the name suggest simple. Interest is a straightforward method of calculating interest on a loan. As mentioned earlier discographies discouraged by multiplying the initial amount that as a principal and the interest rate and the time median it does nothing more than interest on the principle component only.
Let’s look at an example. If you lent dollars and dollars to your friend to your least in interest of 2 percent for 5 years then each year you will earn a simple interest and the end of the first year you will own 2 percent of doubles and that is 20 dollars at the end of the second year.
You will gain 20 dollars at the end of the third year you earn 20 dollars yet again. In short you will receive the same interest for all the years of the loan. In the end you will get back your initial principal plus two hundred dollars as interest.
Two hundred dollar interest this guy gloated about adding that interest earned each year. Gambone interest on the other hand is slightly different. It is the interest on the initial principle blessed the interest earned on the interest or the entire duration. Let’s do a simple example.
If you lend a dozen dollars to your friend at a yearly bond interest of 2 percent for 5 years then each year you will own a combined interest. At the end of the first year you would earn 20 dollars which is the same as simple interest.
However at the end of the second year you would do put an interest not only on the initial Some Lent but also on the interest received in the first year. So the next year interest is 2 percent off does and 20 which gives his 20 dollars and 40 cents. In told.
You will receive interest on doubles in 20 plus 20 dollars 40 cents which is the interest only the second year. This can do things happening to the end of the Dome of the lawn. Let’s simplify the circulation.
Do you want big or a seed. After n years is simply the principle and multiply by one plus i n times. The end result will include the bond interest and the usual principle. Hence the or is a principle you would have to be subtracted from this result. Do I buy the bond interest earned or bid. Let’s look at the same example that we saw some time back.
You lent dozen dollars at 2 percent compound interest for five years using the book form LA in five years. Dollars in dollars would become one dollars in one hundred four dollars and sense the bond interest would be a moment less a dozen dollar principle.
Does giving you the same result as 104 dollars and cents. Let’s simplify the compound interest equation fodder. This will help you remember the formula and apply it easily. We know compound interest as principal of Dimes. One place I agree with is the bar and mine as the principle.
We can deed the common principle of old older the bracket. Do I right a simplified formula. Does compound interest is beatdowns 1 per. Ideas to borrow N minus 1. If you don’t understand the derivation of this formula then I suggest read was a deal.
The last few slides. This is however confusing you did simply remembered to find a formula. Looking at the same example as before we end up with the same result. In common parlance would wonder if as to interest rates they’re normally docking a body on bond interest. Bond is a boon in the finance world when you deposit your money in the bank.
Not only do you receive interest on a deposit but also you receive interest on the interest earned in combines a simple interest. You would make much more money. The downside however is that if you borrow money instead you end up being more than what discogram did using simple interest.
One important concept in compound interest is a frequency of bonding when you deposit money in your bank. Not only are you interested in the interest rate but also your interest in how often is the principal and interest component component.
If the bank says you receive it per cent the next question should be what is the bonding frequency the combined frequency could be your only half yearly quarterly monthly weekly daily or continuous.
As a general idea if combining frequency is n then there are N periods in that year and the effective interest rate for each beta is divided by N.
The principal and subsequent interest is then compounded for each of the bids. Let’s look at a simple example. The bank gives you 8 percent interest bond quarterly. There are 12 months in a year and quarterly mead’s every two months.
So the number of periods is to only worry about three four for the effective interest rate for each Pido. Is it percent desirable for just 2 percent. So in one year you will receive dimes. What bills I buy for Race to the bar for.
In generally derms gambone interest can be defined as follows. Digging be older the bracket we are about to or bobus more simplified and more generic form larger. Let’s try to understand this. Would there by the following day.
The bank gives bond interest had 10 percent annually for two years. If the combining frequency is one that has some bonding happens usually the interest rate in this gift would be dent percent and the number of people you do or would do your opinion.
If on the other hand the compounding frequency is to discuss the bonding happens half yearly interest rate for each period is 5 percent and the number of periods as for or would have do European.
On the other hand if combining frequency’s quarterly their interest rate is 2.5 percent and the number of bidders is eight or would do European. Similarly if combining happens monkley Interest rates I don’t but worry about twelve point two percent.
The number of bude or the two years is 12 times to net is 24. Similarly if bonding happens daily the interest rates for each period is 10 percent divided by 265 the number of beeton’s in this case would be 265 times to get a 7 degree or would it do European.
Now using this we couldn’t include good bond interest in each case. Good bonding happens when the combining frequency becomes so large that it looks like bonding is happening at the smallest possible time frame.
The interest is on constantly and interesting merely begins earning interest on itself. Tried to play around with the combining frequency increase end from 365 to a hundred does and see what happens as n becomes larger and larger.
Interesting that your purchased containers and bonding. There is a slightly different yet simple formula to go. You just cant bonding. I recommend that you have a look at it. Once you get to hang of the basic formula as an extension to the above exercise let’s compare that interests you see by bonding with simple interest. Let’s assume the bag lends hundred dollars and a simple interes of don’t per cent and relief for two years.
Nor do you be a calculating simple interest at the end of the first year. You get 10 percent or a hundred dollars just ten dollars at the end of the second year. You get the same 10 percent of hundred dollars that is 10 dollars hence the daughter interest earned. Or do you obediences 20 dollars.
Now you can see that going to udi’s can bonding will give you dice interest and simple interest will give you the lowest does difference becomes larger when the time period increases and the principal unwon becomes larger.
Try to play around with different interest rates time periods and frequencies and go glid book Bond and some book interest does will give you a good idea of the calculations and you would start getting comfortable with the concept.
The Present and Future Value of Money
If you recall from the previous lecture on the time value of money we talked about the value of money received today just because we can lend that money and receive interest. In other words the future value of money is a present value breast dangerous component.
Using the component interest formula which we learned in the previous lesson we can write the future value to the present value dymes ONE plus I buy and raised the bar indeed. This is exactly the same from LA which we saw in the previous less than year end is a combining frequency is annual interest rate and D is the number of years.
Let’s look at an example. The future value of hundred dollars compounding interest rate of 8 percent at the end of 10 years is hundred times 1.0 age raised to the bar. Ben does gives you a value of two hundred fifteen dollars and eighty nine cents. Likewise we can agree on the present value by using the same formula just by shifting the domes around.
So the present value is the future value divided by 1 plus. I buy n raise to the bar n d. This is basically saying that if you expect to get two hundred fifteen dollars and eighty nine cents in 10 years then its value as of not hundred dollars.
This concept is the exact opposite of bonding. It’s called discounting disturbance is very important and is used in several important concepts of finance such as valuations and gridding annuities. Now you look a good bonding and discounting of a single hundred dollar bill.
But what if he expected to own a series of hundred dollar bills or a beater of down. Let’s look at an example. Assume you were to receive hundred dollars or would the next five years.
How would you find a present value of their dioceses. This is simpler than you expected in order to get the present value of the entire cashflow. You simply find the present value of each cash items and add them up. To Douglas a problem. A good starting point is to draw down line so the step one is to get a time line in place.
This will give you a nice was a representation of each cash item. The next step is to discard each cash flow to its present value using the interest rate. For example the present value four hundred dollars received in the first year is opt in by discounting it by the interest rate.
Hence be one hundred be worried by one point you Lloyd. The present value for your two cash can be farmed out some only by discounting it. Hence do is 100 you over one point you do it raise to the bar do.
No discounting it. Once we bring your two guys to your one hand you have to ask again to bring it back two years you know that as to the present day. Similarly Evey 3 is a hundred. You are about one point.
You don’t get it to the bar tree and so on. The present value of Denn dice series is baby one blessed baby do bless baby 3. So on to baby 5. The value opt in by adding all the individual resin values is a net present value of the baby the series on a similar note.
You can also agree the future value of the Castros is basically seeing what with all the cash was gone. After a defined period of time. Let’s dig the same example. What one hundred dollars received from today. Do your for begon be your faith.
The first step is to visually represent the cash flow with the hope offer down the line. The future value of your cash and your five hundred dime one point you don’t need to do is to the bar 5. Hence every zero is 146 dollars and 93 cents.
The future value of your one gash under your five becomes hundred dimes 1.0 idries to the buyer for some lowly The future value of your cash and your five becomes hundred times 1.0 Idris to the bar 3 and so on and so forward to the last gas growers can bond in the final step is to add all the future values to it. But the net future value of down degassed law.
Let’s straddle the subject to practical examples. Let us you you buy a product that costs you thousand dollars today. Where does product will help you own 500 dollars for the next five years. What is the net present value as you make it an interest and what does this tell you about your investment.
The first step is to create a time line. You should know that the initial investment of does and is changing as a negative amount. This is done to differentiate between an outflow and an infidel. The next step is to start discounting each gadg floor to see what you will own in today’s terms.
The present value of the tools and dollar cost is Tosin since it has incurred today. The present value of the 500 dollars received in year one is 462 dollars and ninety six sense. Similarly the present value of the 500 dollars receiving your do becomes 420 dollars.
Sixty seven cents. We do this for the cash close to each and every gashed was discarded back to its present value. The present value of all that inflows adds up to one thousand nine hundred ninety six dollars. So effectively you received one told a nine hundred ninety six dollars today.
But remember you have spent dozen dollars on the product. So the net present value is one thousand nine hundred ninety six. Mine is a totals in dollars giving you nine hundred and ninety six dollars. This is effectively saying that are making a profit on your investment and it’s a worldwide investment. Try the same exercise.
It is you and that you will receive hundred dollars for five years on an investment of dollars in dollars as you make it in interest. Would you still buy the product. Now let’s look at a practical example for future value.
If an investment manager talks to you about investing a hundred dollars for three years and you will receive fine with a dollar back at the end of the fifth year is it a good investment as you bussin interest as usual. Let’s start with a time line in five years.
The first hundred dollars will become hundred times and you don’t eatery’s to borrow 5. The next hundred dollars really been invested for four years and really become hundred into one point. You don’t need risk to the bar for.
The and the final hundred dollars will become hundred into one. When you did raise the bar to be adding three future values had you invested a sum at 8 percent you would have received four hundred eight dollars and 95 cents in five years.
The company is clearly giving you a better deal by giving you an additional ninety one dollars. Hence it is a good investment and what entering into. To sum up the concept of present and future value simply deals with finding the value of future cash flows into your stumps in order to find this value in future terms.
I would highly recommend that you practice this concept with a few examples of cash rules. Start by using time lines as if originally you to present your cash flows. Get a good grip of this concept. You will be using this extensively in future topics such as project finance want valuation and corporate finance.
From Individuals to Corporations
The basic tenets of Boston finance is to assess what’s going on financial position predict short term and long term needs and to develop a plan to fulfil those needs and once individuals such as you and me need to earn save and spend more resources or were dying in this process we make several financial decisions that revolve around budgeting planning saving borrowing taxation and insurance.
A budget is a plan free of future income expenditures that you use as a guideline for spending and saving the need for a budget arises because most people end up spending more than a day on and hence put stem cells towards borrowing money from us. A good budget can help ensure that you pay your bills on time.
Have funds to go on expectorant emergences and reach your financial records. It is important to know what you are on and make consistent efforts to spend less and that doing so will automatically ensure that money would be saved aside for future needs with Geneses.
The starting point of a budgeting process is to know your monthly income. You should add up all your incomes from various sources and deduct the tax component appropriately. The figure that remains would be a net disposable income. Odds are known as your take on income. The next step would be to estimate your expenses.
There are few expenses that are fixed and don’t change month to month. Examples of such expenses would be your house rent insurance premiums and school fees. There are household expenses that can vary month to month. Such expenses to towards food entertainment and travel expenses can be budget by digging a three to four month average value so at this stage you should be able to add up all your fixed unless immediate really big expenses.
Once you’ve dug up your monthly income your monthly expenses you can subtract bought. Do I write about the difference. I do. Does different should be in a positive direction. Does it ensure that you do not end up borrowing money to cover your expenses.
It would also ensure that you do not need to make compromises to your lifestyle. This brings up the next important point that is financial planning financial planning is a long term process of managing your finances in order to achieve your goals. We all have goals in life. Some want to travel the world while others would like to ridded rage. What do the good be.
There has to be a plan to make sure one is well guided. It is however important to remember that financial planning is a process and not the final product. Let’s face visit the concept of savings. When your income is more then your expense you end up saving money.
If you recall from the section on banking excess money to be lent out to people or companies that require it does is normally done by depositing money in a bank while saving are gone. There are other matters such as buying bonds and investing in stocks but we believe that as of now I would go that in a different section.
Let’s move on to the other side of the story. When your income falls short of your expense you didn’t have to defer your expense or you would have to borrow money in order to fulfil your needs. There are several ways to borrow money.
You may approach a lender for loan or you may get a line of credit. One such problem is you use a credit card use plastic cards. I used to make but uses by differing payments even though it sounds great.
The use of credit is not of any burrard fee off managing your finances. People dicking credit do often get stuck in what is called a death trap debt and borrowing money in order to be Baghdad debts and thus pushing denso to was deeper debts.
When discussing income and expenses we briefly dosed up on the concept of taxes. The topic is whilst an in-depth study of taxes can become a new course in itself. At this stage we introduced you to the concept. And why is it important to manage it from a business finance perspective.
Tax planning is very important not only because it reduces your income but also because they are enforced by the government not being dexies due. It’s called us tax evasion and could cause you to be heavy fines and penalties.
Having said that there are legit ways to reduce your tax burden and this falls under the Bof your tax avoidance. Some countries allow you to invest in search and goldman’s schemes where you can see if taxes on a modest investor and an auto on dividends generate in most modern governments use a progressive income tax structure.
Ask But the structure one has to be a certain amount of tax depending on the income slab he or she feeds into. Typically as one’s income grows a higher marginal rate of tax was be B. Let’s look at a hypothetical tax slab.
If one’s income is twenty two thousand dollars he or she would fall into a toad tax bracket and would have to bid 30 percent off any additional dollars earned in the first ten thousand dollars he or she would not have to pay any tax on the next ten dollars and dollars he or she would have to bid 20 percent of ten dozen dollars that has to Tosin dollars.
However for the women to does and a marginal tax rate of 30 percent would apply the net tax liability would come what do we do. Does six hundred dollars. The average tax is however much less discouraged by the door to Doug speed divided by the total income. In our example it would be two dozen six hundred.
Do I need to do tolls in dollars. That is eleven point two percent. Doctors are merely of two types. One is the direct dacs and the other is called indirect acts direct acts as a bid directly by the individual or the organization to whom the taxes levied in comparison indirect taxes levied on one entity such as a seller and its bid by another entity. An example of such a tax is sales tax.
Tax planning is a crucial part of financial planning. Understanding how to take advantage of various tax breaks when planning once puts and finances can make a significant impact. Not only that one should ensure that all you use a clear so that the fines and penalties are not imposed upon you.
With this we move on to the last and most ignored aspect of personal finance that has insurance in the quest to achieve one’s cause. Some days we come across incidents that push us off track from warrigal’s.
These incidents don’t come in any form. It could be sudden death in the family or it could be a fire that burns one’s house. What do with the geese may be doing you must but use protection to ensure that such incidents don’t order their lives down.
Insurance is one such material buying protection. One has to bid the insurance company of some off money that has a premium. After each breeda of down return the company would guarantee protection against financial loss as a result of such incidents. On the occurence of the insured event the company would make a payment to the insured.
Looking at the importance of these companies that we trust and confidence. Some of the bottom production types are life insurance. Automobile Insurance TEFRA insurance and medical insurance and delistings goes on the geeting to remember is that insurance should not be ignored.
I know we all don’t like to imagine a calamity happening to us. However one should think practically and Gober oneself so that unexpected events don’t affect one’s lifestyle and that of one’s dependents.
Introduction to Financial Accounting
In the last lecture we saw how individuals assess the financial position and dig various decisions to predict and maximize their rent in order demanding a desired lifestyle. We simply doing do a jewels. God needs to make several financial decisions to protect and maximize the wealth for the shareholders and demanding the operations.
While starting this topic be the draw balance to postal finance. This will help you understand how companies function and report to financial status by drawing analogies. You will appreciate the fact that companies out in a very similar manner to how individuals work just like help individuals prepare budgets and mending a dab of debt our needs and spending’s gone needs to use the principles of God and see to mending a dab of income and expenditure.
To start off let’s first define financial accounting and then look at the key statements that are prepared by a corporation financial accounting is the future of finance that is concerned with the summary analysis and reporting on financial transactions. But gaining do a business in wads of preparation or financial statements are visible to the general public.
The main objective is to provide financial information a body that important entity that is useful to existing and put Asian investors lenders and other creditors in making decisions.
What providing resources to the company. What are the key financial reports. Is the balance sheet just like in doing you have defined the network by subtracting their liabilities from their assets to own got pennies grid balance sheets to give people a snapshot view of what their what you have invested or blanning DO invest in a company.
It is important to understand how the balance sheet is structured so that you can read it and analyze it in the most basic form. The balance sheet is a snapshot of the company’s financial position and a single point in time in this report.
The company mentioners assets its liabilities and its equity. Do you balance sheet items. Give investors an idea of what the company owns in terms of assets and what it all is in terms of labneh dues as well as they are more invested by shareholders or balance sheets must have its assets equal to the some would that IBD and a shareholders equity asset I listed from Doppler down in order of liquidity.
That is how easy it can be going to wander into cash they’re split into two categories. The first one is current assets and the second one is noncurrent assets also known as fixed assets. Got an asset and assets have a lifespan of one year or less are highly liquid meaning that they are going to be going to wadded into cash easily. Such assets include cash or cash equivalents against receivables an inventory noncurrent asset on assets that are not easily done in cash within a year.
These atoms have a lifespan of more than a year. Such assets include tangible assets such as machinery equipment computers building and land noncurrent assets also include intangible or non-physical assets.
These atrs cannot be Dutch physically fit the definition of an asset as they are valuable. I know I do have positive economic value. Examples of such assets include goodwill builder and brand value and copyrights. The second half of the balance sheet good deed the D of the company. By definition.
I lobley do something the company always do outside bodies just like the ghis of assets like Biddy’s do short term and long term in nature for delivery deeside DOUG to organize in the order of short term to long term good or short term globally.
These are the ones that become do with the near such a short term loans etc.. Long w.d. are the ones that are due after a year from the got ended. The last I don’t know the difference between the assets and liabilities.
This is called the shareholders equity and is equal to that initial amount of money invested into a business and did it did earnings had gone assets equal to the sum or the liberties and the shareholders equity keeping the gondek equation in balance any increase or decrease in one side of the equation should also be accompanied by an increase or decrease in the other side.
This concept is known as double entry accounting risk transactions have to be gorder in do accounts. That is an increase in asset account for example must be balanced by a decrease in another asset or by an increase in the liablity or the owner’s equity.
Let’s look at a few examples. If the company uses fifteen thousand dollars to produce a piece of equipment this would result in a decrease in gash which is a current asset and only when an increase in equipment which is a guine an asset.
Another example would be using dentals and dollars to be off short term debt. This would result in the reduction of cash which is an asset and also a reduction in short term liability. It is important to stress that the equation must always be balanced that as assets was always be equal to the sum of the library D and the shareholders equity.
The next day been published by a company is called the income statement. It is often known as a profit and loss statement. Repeating the statement is very similar to jotting down your salary and then reducing expenses and taxes to see what is left in the end.
The main idea behind bubblish an income statement is to show investors what their net income is after deducting or the gross expenses and taxes. Just like individuals got measles so strive to keep their expenses and Goss lower than their income.
Doing so would insure that the owner profit and save money either do invest in more projects or doing it back to the shareholders as dividends. In the most gendered form the incomes didn’t start by boarding the nets sales it ever knew this is the money I earned by selling goods and services. After digging into a deductions off returns I lie once as for damages or missing goods and any the discounts from this figure.
The government starts to reduce various costs and expenses. Do I want to see profit. It starts by removing the cost of goods sold by definition. This is the accumulated cost used to create a product or service which has been sold needs goes falling to the subcategory of labour.
What do you do. And or here. The figure I gave after the subtraction just got a gross profit from this. The government would reduce operating expenses. Do right by the operating income. Operating expenses is the old going cost for running a product business or a system.
It is a day to day expenses such usses and administration expenses or research and development expenses from the operating income the company would reduce any other expenses to arrive at the pre-tax figure.
Just like you do as you as corporations do bid taxes. These taxes are known as corporate taxes and have to do more from the predix Figure do arrive at the net income after tax. This is very similar to what in the indwelled you will see if after all this spending and taxes.
Understanding income statements read ahead what I understand the profitability of a company is compelling do and walk what does if one sees a jump in his day expenses and taxes that demean the same then one can conclude that the profitability is increasing and a good base and what. Investing in such a company.
However looking at the incomes did a nice solution is not a prudent and wise one must also look at the other two statements in order to make financial decisions. After seeing the balance sheet and income statement we look at the total and last statement published by a company this board is called the gashed Wall Street brand. Just as an employer.
Yes the cacharel statement Drats the movement of physical cash added boards to financial position off a company in the most general form it resembles a bank statement. It would add the cash inflows to the gash trotting balance and then reduced the cash outflows do arrive at the closing balance a government to put the cash in an and flows from two different sources new sources are highlighted in blue in the following day.
The first one is cash from operations. This is the interview and odd floor caused by the core business operations. The second source this guy from investing actor woodys he had the floor. Cash is due to buying or selling assets that are good sources cash on financing actor woodys here in an odd law is due to raising money from investors and or being dividends.
Nor did outflows are normally depicted in red with brackets from this gibbered be going in for the. Cash flow was positive and increases by 70 dollars in dollars adding does to the start of year value. We get the end of your bag you want So details in dollars. It is good to remember that a strong positive cash flow especially from operations or would a beta of time is a positive sign of a healthy company.
As mentioned before as a financial analyst one must look at all three statements together. The trees did when Dawn work in isolation are interconnected and must be analyzed together.
Let’s look at some examples of this interconnection. If at the end of the year if the company decides to invest some earnings after taxes back into the company such when you would be transferred from that income statement to the dreaded owning section on the balance sheet.
For example the statement shows the net income was fifty dollars in dollars in 2. and 15. The company declares dent golden dollars of that income as dividends to a shareholders.
That meaning for details in dollars the company decides to invest it back into its own company and that it in owning a balance sheet increases by for details and dollars from dent than dollars in 2014 to fifty dollars in dollars in 2015.
Let’s look at another example. Donate cash through in the cash flow statement from one year to the next. Should equal to the increase or decrease in cash between two consecutive balance sheets during that beadon. For example the gadget was jinman Chose a ten dollar and dollar increase in net cash on the balance sheet.
Gas increase by ten dollars for five thousand dollars in 2014 to fifteen thousand dollars in cadotte and 15 gauge. It makes sense to slow down and for financial statements and to have a look at the structure and Guey sections.
Your aim should be to see the ideas you Gordon and the manner of presentation. Now there could be differences in presentation style but try to get a feel of the general structure and the key items important.
Introduction to Financial Analysis
Once we get a hold of the three students the last part remaining is the analysis of such statements. Have you ever look at the individual and wondered how much the what what did it on and how would they manage do expenses.
Where do you get the same questions that come in the mind of a financial analyst. Sterling and company do you sever gracious and domes to identify how well the company performs. Simple of calculations can be done on each statement and also on a combination of more than one statement. We will not look at all the ratios.
However we will introduce you to some simple ones so that you can understand how their degree and analyzed the first hope reassured that we will look at miscalculated on the balance sheet and is used to identify the ably deal form to satisfy a short term obligation.
Destry sure squad the liquidity issue it is defined as the current assets divided by the liablity also known as the kondratiev. If you recall from the section on balance sheets. Assets include assets such as cash and those that are going to be directly going to wander into cash.
I’ve got to globality that the wonder the company is in the short term by dividing one by the other one going to dominy of the company and be showed them dues using the gash or the gashly goochland. On the other hand the ability to satisfy long term obligation can be drawn using the solvency issue.
These can be gaggling has a long term debt to equity ratio to do good debt to equity to issue the debt issue and the financial leverage. On a similar note and Lisk and perform calculations on the income statement to determine how profitable the company is. An example of surgery short is a net profit margin.
You just Guagua did wonder why did the Net income by that revenue it is normally expressed as a percentage which hurts. In comparing these values or would a beta of down a similar issue is operating profit margin which devised the operating income by that ever knew such ratios are normally analyzed over a period of time in order to see the trend in profitability. This will help answer questions such as is the profitability going up or is it going down.
Analysis is also done on the gastrell statement in order to measure the company’s ability to be on dividends from its origin. Cash flows. Analyst divide the cash flow from operations by the dividend bid. It goes without saying that a consistent and high value of this ratio is a sign that the government is performing well and has the ability to be on dividends without any major issues.
The discussion of whether it should is beyond the scope of this Dorian The idea is to explain hold ratios work and how analysts use it to gauge the health of a company. As you get comfortable with the radio statements it makes sense to Thursday Internet for commonly used ratios are to no doubt analysts often use different combinations of data to analyze a company.
At this stage do get into the trap of flawed learning all the issues. Instead focus on the concept behind the ratio. That is what Israel should trying to achieve. This is similar to a doctor who performed such an desk to us so doing your hold this we conclude this section in the next section. He was study a bit more on what companies learned would God prefer announces all about before we move on.
Let’s look at a study on accounting scandals.
Case Study: Accounting Scandals
In dissection we learned and mediary border on ink’s assets and cash close to the general public in order to provide financial information the aim or do statements this to instill fear in the company for investors and great leaders to commit their hard earned money.
Financial analysts use these statements to understand the business model and to assess the financial head doll from looking at the importance the correctness of these did was. Must be insured. In order to do so. Independent companies are appointed to audit the statements published by the firm.
These auditors check the statements for accuracy and question key management employs. Once they are satisfied they give their seedorf approval and investors can simply as you know the statements do big the true picture. Unfortunately in the real world there have been numerous instances of finance and accounting frauds.
These forms have managed to work a lot on the auditors student incorrect statements and been doing the wrong picture over the years they have managed to slip through the cracks and receive funds from investors.
Needless to see that once that good falls the true big Joseph viewed and investors lose their hard earned money in the hands of these frauds in just lecture. We will look at Duke who studies the financial fraud. The aim is to understand the nature of such frauds and to learn how analysts must be careful and have an inquisitive mind. The first case is that of a who’s done base energy commodities and service company known by the name of Enron Corporation.
This company employed or would do dodman staff and was the world’s major electricity natural gas and communications company. During the 1990s Android invested heavily in all these assets especially energy.
It grew boldy largely due to marketing promoting ball and its high stock prices. It was so successful that it was named America’s most innovative company by the Fortune magazine for six consecutive years. However not many knew that the company was hiding huge debts off its balance sheet.
If you’d record debts like Moody’s and large quantities offer it is not a good sign. Large amounts of debt in Greece that is sure such as the debt ratio and the debt to do asset ratio. This makes the company look unstable by hiding dead and Ron was effectively making the company look stronger than what it actually was.
Could has also discovered that many of Rod’s recorded assets and profits were inflated or even fraudulent or non-existent. As the scandal was revealed Enron share price has decreased from their ninety dollars to just a few pennies and the company filed for bankruptcy on December 7 dollars in one dollars it has lost jobs and investors lost their money.
The demise of one of America’s malls in a word of God only shows us that one was be careful often adding malpractices and dad as an analyst. One must be careful when analyzing statements. There are many red flags in the end run games if only they were analyzed properly and cautiously but would not have lost their hard earned money.
The second guess is that of them computers. This was an Indian idae company based out of hydro but India the company was one of the leading information technology firms of India and offered a large range of services including soffer development package soft integration and enduring design services in the UK looked on in five said Tim computers gleam SEALs grew 40 percent with 26 percent profit margin. Year after year the seeds good seemed good and steady.
Things looked rosy doodles in 9 when the chairman Raj malinger argue resigned and confessed that he had fought. He boosted the revenue by one point five billion dollars. This sent shock waves to the stock market and led to badging selling of the shares and the share prices tumbled causing investors to lose millions.
Post a scandal bwc the audigier of game was fined 6 million for not calling the cordo conduct and or iddings standards. This gives brings on the borders of what order and how accounting frauds can destroy large firms in a matter of months.
The Study of Corporate Finance
Sources of Funds
Company’s did made to function. One of the main areas of corporate finance is to study and decide on the radio sources of gupton ability to a form.
Let’s have a look at an example. Let’s us you did you wake up one day with the brilliant idea and you decide to put in some money and make mikdad dream in guri Audi dweh problem is that you have limited money as a first step.
You don’t do your family then you pay a visit to your friends. Fortunately you all end up collecting a small fraction of what does initially require. You decide to borrow money from a bank. But being a start up you’ll only get a small amount and dad had a high interest rate before you decide to throw away your dreams.
You put up a notice to the general public in a hope that some people may find your idea good limit and are putting their money into it. Does nor does it generally put up with the hope of an investment bank.
Banks greed infrastructure and do the Borg for you receive funds. When you start to receive funds from the public you will realize that there are differences in what people are expecting in return for their money. Some act more like a bank and request for interest in return.
Others may request a share in the company and the profits and the rest me ask for a combination of the do. The first type of investor is dawna’s a great deal. The company issued a bond in return for the money received a bond is nothing but an agreement with the company whose the borrower will decide to make experiments in the form of interest to the lender.
At the end of the contract the company would be done with the investor the Principal amada lent along with any interest dues such investors dont have any claim on the company’s profits and a bid interest before the other investors are bid. Also Indian fortune it gives off of bankruptcy the company’s assets are sold off to be of creditors forced. Does giving them presidents or other investors this type of financing is known as debt financing it is so-called because the company is in debt 2B of these loans.
The second type of investors are the shareholders. These people lend money in lieu of for share in the Cosby’s ownership and its profits. Hence by buying shares they’re in effect becoming the owners of the company for each share they hold. All are good awarding right to decide important things for the company.
The toad type of investors are hybrids and want the best of both the worlds with the company’s growing. They would like to have returns in the form of profit sharing. However when times are bad for the form to get a steady income forget also what do with the case may be.
It goes without saying that when the company grows and becomes profitable it starts to get cheaper sources of money. It would command more trust and interest it would have to be to the bank or to its creditors will gradually fall.
The creditors would see lower risk on less money and hence would demand lower interest. One or the job of finance manager is to decide on a combination of the sources or fund doing so don’t object. Should we do reduce the risk of the company and yet manage to fund our day to day operations in order to buy assets debt financing has as books and disadvantages.
If you recall from the section on the income statements they just couldn’t pawn in this bid before being dax’s. Hence the company’s not lab to bid dax’s on that interest. Higher the interest lesser would be a tax liability. However do you want too much debt is considered risky as a company’s Labrea to pay interest on a timely basis.
Any default would put pressure on the company to liquidate its assets to pay off the debt. Equity financing on the other hand is less risky but it dilutes ownership of the original owners. Hence Guppy’s have to make a decision between using dead gub to have liquidity gupton company use the debt to equity ratio did to mind a proportion.
If you got from the previous section you find both debt and equity on the balance sheet. This mix of debt and equity is termed as a gapless structure of the company. Let’s look at it type what typical example to draw. Debt of ABC limited listed million dollars that does shareholder equity is 20 billion dollars. The debt to equity issue in this case because he wanted to do. Or 50 percent.
Normally companies have a policy on the maximum reassured can have under your model deaded can dig this through. Sure history is not fixed and Junior’s from company to company. It also depends on the type of industry one is operating in.
If a company is in an industry where debt is easier to opt in. Did the debt to equity issue was higher for large corporations equity financing and sometimes chose in a good debt as it is less expensive to sell stock. Danny just to be interest. So we see that sometimes companies prefer debt gap too while other Dammes of briefer’s equity what do with the case may be.
If a company needs to bhajis a building it is a job of the corporate finance department to earn enough funds to fussily did the splodges. In doing so they have to decide on the best mix of gabo and an age difference. Having seen the sources of fund let’s move on to the actual costs of procuring the funds. This is also known as the cost of capital.
Cost of Capital
In the last lecture we saw that companies use various sources of capital to fund their operations and capital expense. What we didn’t see was to have cost of procuring such funds if the government decides on digging debt gabbed only it would have to issue bonds and bid investors interest and return the interest rate for such gabbed to discord the cost of debt.
Let’s assume that a company has bonce at an interest rate of 8 percent. In this case the cost of debt is gallogly different 8 percent. On the other hand if the company decides to fund its operations using equity capital only then the goes to procure such gabbed gabbidon his donors of gosse difficulty or form scores difficulty represents the compensation the market demand in exchange for betting the risk of ownership.
The restaurant metaphor used to reduce cost and it has it represented similar to the cost of debt that is in a percentage form. If you do good you don’t say you rely on debt or it could be a loan. They use a combination of debt and equity to finance their businesses.
These companies mending are deadly. Could you do a show how the overall cost of capital did April a regent average of all the Gap good sources destroys present a net gosse have CAPTA is known as the region average cost of capital on the rack.
The Rack has Guagua in a very simple manner. It blows the proportion of equity with the cost of equity and the proportion of dead with the after tax cost of dead and back equals should Dick would you proportion. Do you worry about daughterly value in the course of liquidly bluster.
Dead Bush. You worry about the true value into the after tax cost of debt B was one months down the cost of debt to factor in the dags benefit of debt. We have discussed this earlier in the income statement. The interest has been before being dax’s heads there’s no tax implication on the cost of debt wragg basically in gold prices concept and reduces the cost of debt by the dollar amount.
It is insane but derms the region average over the course of these types of financing each of which is needed by proportionate was in the given situation by digging the region average in this manner. You can determine how much interest got any oars for each dollar it finances.
Let’s look at an example of doom. There a form what what 4 million of debt at the same time. It borrows 6 million of equity capital. The debt percentage of the form is 40 percent while the equity percent a 60 percent.
Little tells you that a course of debt to 6 percent while the cost of equity is 8 percent. The back is simply the rigid average of the respect of course of funding. Assuming a corporate tax rate of 20 per cent the proportion it got of debt is 40 percent of the after tax cost of debt has computed as 40 percent or 6 percent of one minus tax rate.
So really the proportion of equity is 60 percent of the cost of equity that is 60 percent of 8 percent the back as does computed as the sum of the retrade course of debt and the rigid cost of equity. The form’s vac is or roderic wydra DOn’t off or form because of this. The company’s management often uses vack internally in order to make decisions.
Let’s see an example from wants bosomed life. If you borrow money at 8 percent interest and use the money to buy a machine that helps you generate money at 6 percent do you think that there is any benefit on the other hand.
If you had invested in a project they’d give you 10 percent. You could use it but it would be of the debt and bokken the remaining 2 percent as profit. That’s how you withdraw boat got reasonable in a similar concept.
You use the money to invest in projects that would under more than what they would have to beg to acquire the money. This has hold the on both for their shareholders. Next delivery dive deeper into the world of corporate finance and see how companies halik projects.
The Process of Capital Budgeting
Companies invests in projects that generate wealth for the shareholders. Unfortunately they have limited resources and need to get full decisions to use the money in the right project. Such projects require some sort of initial investment and a gendering gashed will over a period of time.
Examples of such project could be the butches of new machinery. The pages of a new corporate office or simply the pages of a new transport van. In either case there’s an issue was in. However the butches are used to generate cash for the form or would have been a rough time Captain budgeting is used to decide if the project does what investing or not.
In order to do so you revisit what you studied a few sections back. This is the concept of present value for a normal project written in sheet cash flow followed by a c.d or expected after tax cash inflows the net present value is a present value of the expected an increase minus the initial gosse of the project a positive npv project is expected to increase the shareholders velt.
However negative in you project you expecting to decrease the schedule as well as you do and b project has the expected effect on the share or Roosevelt had a discontinued use is the back you can view this as average opportunity cost of not investing the money because of forms vack reflects the average cost of a project that makes up the form.
It is not appropriate for you. You’re adding on new projects which should be adjusted upwards for projects with greater than average risk and onwards for projects which leaves average hirose. Hence using the company decides over a project is what investing or not.
Let’s look at a simpler project. ABC Ltd is an indelible are you planning to buy a printing machine. The increase of production of books. The initial cost of buying this machine is dentals in dollars. The management has us to media and by printing more books never generate an extra revenue of 2500 dollars for each year over the next five years.
This has altered the life of the machine. At present the company has a debt of one billion dollars and an equity gap of two million dollars. The present cost of issuing debt is 5 percent and that of equity is 8 percent. The company buys a corporate tax of 30 percent annually using this information the management wants to decide if such an investment is worth the effort.
Just like we learned in the previous section the first step to deal with such a problem is to draw down line. Such a domain we give a big different view of the floor funds. We see an outflow of dentals in dollars and the start of the year and see an inflow of 2500 for each year for the next five years. The next step is just gone.
Each gas law item by the appropriate discount rate. The study in this section got to get escondida Use is vac adjusted upwards or downwards based on the risk giving us or the project. In order to aggregate.
We use the dead to value ratio which in this case is one where three and equity two door to value ratio which is to buy three using the for no studied with Gary Divac a six point five percent management believes that this project is off average riskiness and decided that the six point five percent. Is that correct.
A second factor discounting each gastro. I don’t buy the rag we arrive at the net present value of a Bozz diff three eighty nine dollars.
Does bosra Figure suggest that investment is worth investing. If on the other hand the management decides that the project is risky and add a risk premium of 1 point 5 percent to the back they will now get to a discount factor of 8 percent and the net present value would genest your negative 18 dollars so you can see the deciding under discontinued has a profound effect on the npv the company’s management must be ghetto decisions to assess the riskiness of a project and gangling the correct and B base so decisions.
The company big money making projects and increases the shareholders vote. Would this be gone through a section of goderich finance in the next section. Give a look at financial products in great detail and assess the risk there Gary.
Financial Products and Risk Management
Introduction to Bonds
In the last section we saw that gabonese borrowed money from investors in return of Dimes interest payments due to the fact that companies be able to a fixed number of pre-defined payments such instruments are also known as fixed income securities in the financial world.
The word bond and fixed income securities are you synonymously the borrowing company issues was born in return of money borrowed Hence the old sold for dws bond issuer. On the other hand the lender that does investor will recede the Born in return for his money hands delaford was born or knows to form such an agreement between the issuer and the owner to enter into a contract known as the bond indenture or the rights of the issuing company and the owner of the bond.
I mention in this contract. Does indenture candid information such as what each body should do. These provisions are known as coblentz and also include negative and positive governance as the name suggests negative governance are restrictions on the boring company often known as the issue of the bond.
Example does such restrictions either the company going to borrow more money or that the government cannot sell its assets. There are pledge as collateral for middle of positive governance on the other hand the actions of the borrower company promises to perform.
Examples of such actions including doing the Detra issue at a certain level was simply directors on timely payment of interest and principal. It should be noted that such governance make lending and borrowing safe but not foolproof.
In the end it was under the government do under the contract company that I do not do so are branded risky and should be avoided by investors in bid to lecture. We have a look at the risks of such securities ingredient he do for not considering more on the features or such bonce and tried to understand all the dons that it really did do it.
There are many types of bonds. But in the most typical form a bond has the following dobes associated with it and the first one is called maturity Peter. Maturity period is a big deal. Interest payments are made to investors bosom maturity Pedia and interest Dobbs and Prince bully the return to the investor.
The less important term is the buyer value the barter value for Bond is the amount of money to be bid to the producer of The Bond and maturity generally bond unissued with buyer of and is a fee the hundred dollars or dozen dollars. It is easy to confuse buyer value with the price of a bond.
Nor. The price of a board may equal to the buyer value as the first time it just trade in wants the bond starts getting trimmed in the secondary market. The price of a loaf longer be the same. It could be higher than a binary value or lower depending on the return expectation of investors.
Now Justin you can differentiate between the primary market and the secondary market the primary market is a market where the bond is issued for the first time. Secondary market on the other hand is similar to a second hand car market where bonds are drilled between the investors and the price of the bond goes up or down based on investor expectations.
Let’s look at an example during a sand bar of value. If an investor produces a bond with a dozen dollar buy value and the maturity date is said Fiver’s donder old. This means that the issuing entity is required to bid the investor does in dollars after the Fiver’s have passed.
The next important one this coupon This is represented in a simplest form of fixed incomes coupon read is simply the order of coupon payments bid by an investor relative to the bonifaz value or bar value. If a coupon rate is 5 percent then they issue a bid bid investor 5 percent or the buyer value each year to maturity assuming a buyer value of deals in dollars and a maturity period of five years and 50 dollars of bid each year till the end of five years.
The forward important don’t miss a beat frequency. Sometimes investors that bid semi-annually or quarterly in such a case I knew of cool bondies do worry about do or for and bid to the investors semi-annually awkwardly as the case may be. For example the buyer value studs in Denver is sure they’d be paid twenty five dollars for each to me and would be a mint. Do. Point five dollars for each quarterly payment. Naw dad payments received then diadema is the same. It is just that the beamer’s can be broken down into smaller pieces. Now having seen a typical Bond Let’s look at a really and disobedient is called zito called Bond Bond like the name suggests it is an awkward point associated with such a bond. Do not be any be drawn any coupons.
Now you must be wondering why would an investor buy such a bond. The reason is to buy the bought at a much lower price compared to the buyer value in a bid to buy a value at maturity. Let’s look at an example. The value of the bond is told in dollars the investor by zy local Bon bons at 950 fifty dollars and put your money to get the Tosin dollars back to 50 dollars a day.
Make a majority composite for the non-payment of interest. So far we have seen bond set big fixed payments. There are however some variance that choose the coupon Midway as per the written agreement. Step up Nords have the coupon rates that increase over diamanda specific rate they increase mitigate risk one or more times during the life of the issue.
We ought to have Jeff had good bonbons that bid the first few coupons. After a bit of time differed coupons accrue interest on a bid to the investor. After a beta of down under the very bodhran Bond type of loading read bond the coupons of these bond rally based on a specific interest rate or an index.
For example if the market rate is rising the coupons will rise as well. On the other hand if the market really is falling the coupons was fall as well. The most common reference read used is a library. This is the rate at which the banks in London give loans to each other in case of a full degree of security. The Coupon read can be said as libeller plus or minus a margin adding or subtracting the margin. Is it a mine in what has been agreed while signing the contract. As libel changes the coupon will change.
Normally the coupon industry said prodigally every 3 6 or 12 months based on the prevailing market interest rates. No good deed and there are many variants. The type of bond depends on the condition said by the contract. That could be very specific terms that are tailor made for specific investors whatever the case may be.
The basic units of a bond remained the same that as investors would lend money to the issuer and will receive some sort of payment done. We have discussed the most common type of bond needs bonce be interested in what your deal and admit your day bid and dive bar value such was offered was not a modernizing bonds or bullied bonds.
You did a faggot in big bullet at maturity. Another diver born in a modernizing bond instead of being the entire principle that majority did bid interest and a principle. Or would the life of the bond. Some bonds have glod as mentioned in the agreement that defined some deviations that are allowed once this deviation is a prepayment clause.
Think of this when you borrow money for your house. You have the option of being bagged the entire amount. Any time you like. Likewise some bonds have that condition. Dudley Shaw and the bond can retired the bond earlier than maturity by making a full of Bush should prepayment. Another important clause is a court provision.
This provision gives that issue had the right but not the obligation to require all or part of the issue bryde to match your deeds. Once the bonds are called the owner of the Bond has no choice but to surrender the bonds back to.
Sure. And received a call brace or the Born in return. In order to protect investors there is a beating at the start of the life of the bond when the bond cannot be God. However the expansion of the speedo and the issue has a right to call the bond.
Just read the god provision. The board also had the provision. This is the exact opposite of a god and gives the bondholder. Did I sell the bond back to that issue at a specific price prior to maturity. No Buddh the gall and the dumbness that got dragged bride to maturity.
In the case or for God they sure of it be of the investors and normally every issue or another born do local bond rate. Who gives a fuck. But the investor digs bagged their money and invest the proceeds at a higher school bonded. As you can see in either gives a gondar body starts to lose out. You revisit this concept in the topic of Banderas and introduce a major risk of investing in bonce.
In order to value a bond we use the same principle to be used in the lecture the time value of money wanted nothing but a series of cash flows. We had the coupon and the principal payments all would the life of the bond to find the value of the bond. We need to create the present value of this series of cash flows.
If you can’t recall the concept don’t suggest that you revisit the section of the dying value of money. Not a do understanders topic when. If you remember we saw some of the bond domes in the previous lecture. It is time to revisit those terms. The first one was Bar value. This is the value that investors don’t at the end of the life of the bond.
The next day was coupon rate. This is a payment that they should make to the investor on a timely basis in order to value the bond. We need to know the prevailing interest rate in the market for an instrument with similar risk the interest rate is nothing but the expected return of the investor.
This is known as the discount rate unless it by adding a risk premium to dangerous interest that A is free security be as old as the name suggests there is few secure dealer security that has no risk of losing money. An example of such an instrument is a U.S. Treasury bond.
A bag full of feet of the U.S. government was practically zero risk. Such instruments be a very low rate of interest. In order to obtain the interest rate of riskier security just premium is added to the risk free trade distress premium compass’s they invest to for the rest of Digg just by adding a risk premium you give them the incentive to take on risk such as mockeries credit risk etc.
At this stage it is very easy to get confused between coupon rate and interest rate. Let’s step back and look at these terms once again. Couponing is nothing more than the bijur Experiments made to the investor. In case of fixed rate bonds this coupon rate is defining the bods in danger and remains the same toward the life of the bond. The company doesn’t see anything about the expected return of the bond.
On the other hand interest rate or yield measures most the board is expected to return to the investor or a beta of down. If at the time of issuance the interest rates for similar risky products 10 percent. Then investors expect to reinvest each gastro at 10 percent for the remaining life of the bond and receive a net debt person done on as initial investment.
Let’s look at an example. If you have butches the bond with barter value of dollars in dollars does Bond gives a coupon of 10 percent that has a hundred dollars each year. The life of the bond is five years. The prevailing industry is 10 percent which would be the same as a coupon rate for the first time.
The bond is issued. The Coupon received in the year one is expected to be invested at 10 percent for four years. Similarly the coupon rates you do your do is expected to be invested at 10 percent for three years and so on and so fort madie The future value of each cash flow reget the net future value detlor represent a dent percent return on investment that does you would earn over the same amount how you invested the ancients some Lent and a dent percent rate of interest.
With this let’s give another read of confusion. This is the difference between the market price of a bond and the borrower value by value as a moment that has returned to the investor after the life of the bond. The price or the bond however is a sum of money that you bid to produce it and the time of issuance.
The market price is a sum of money you buy or lend to the issuer of the bond discount. The price of the bond equals should the buyer value. It is essentially seeing net you lend dozen dollar to the company and the company promises to be big coupons each year and even dollars in dollars back at the end of the dorm with the warrant.
This is exactly how we have seen in previous lessons. However things get tricky when the bond is restored to other investors in the secondary market. There are few deals that change year. First is the interest rate. We have seen earlier that the economy is in a constant state of flux. You read the first damn of issuance the Gone me was in a growth fees.
The investor was as I do have a dent Andrew don’t expedition however and after you got me into a recession you have seen that the government drops interest rates in order to boost the economy. So even after compensating for the risk they took. Not only expect 5 percent down.
Naw dad in gives off a fixed creed called Bond Bond the good bond payments will not change. The next thing that changes is the one brace brace as a deflection of interest expedition’s you would be the price of a bond based on that have done and generates hired that are down expectations low Vered be the bond market brace and vice versa.
Let’s look at an example. For simplicity consider a bond that has a binary value of dollars in dollars and a coupon rate of 10 percent than what your dealer does. Bond is 5 years and the dying man selling the bond the interest rates have fallen to newbridge an expedition and the bond with a similar risk has 7 percent Musers the appropriate discount crude as it reflects the return expedition’s of this bond.
The price of the bond is sky as the coupons and the borrower value payment is control by the discount rate you scolding each cashflow year over the bond Bresser want odds in one hundred twenty three dollars. This is essentially seeing that my being was told in one hundred twenty three dollars for a 10 percent coupon bond with dollars in dollars borrowed value you a good return of 7 percent in five years.
If the interest rate drops for the 3 percent you would have to be higher to receive a 3 percent in 5 years hence Fisi do embody relationships. I had the coupon rate higher as a bond price and Weiser was are. This is fairly evident. Looking at the valuation from LA we see coupon is in the numerator. Does any increase in coupon really increase the bond price.
The second relationship that we see is that of interest rate with the one price higher that interest rates lower the price and twice or worse. So as interest rates are pure and the denominator increase will reduce the bond price. Now let’s see the federal the coupon and interest rate on the one price would interest rates equal to a coupon rate for example at the time of issuance the one brace would be the same as a bar value.
Does going to be conformed with the help or the following example here Board interest rate and the coupon is 10 percent. This value the bond told in dollars which is the same and the bar value with the interest rate is greater than the coupon rate. For example another dime are for growing the economy.
The bond prices would be lower than the bar value. This can be confirmed with dad but the following example he had the interest rate is at 20 percent and the good point is that 10 percent there’s value the bond at nine hundred fifty two dollars which has lowered the bar value.
That hand with interest rate is lower than the coupon rate for example at the time of recession. The one price would be higher than the bar value. This can be confirmed with date but the following example he had the interest rate is at 5 percent and the coupon is 10 percent. Whose values are born at one time and 136 dollars which is higher than the bar value.
Hence we can see that the baby is born dumb such as coupon barred and interest rates Blear a wider role in determining the price of a bond. I would advise that you fully understand the concept of coupon interest. Bar and market value in order to master the basics of what is bracing before we move to see the risks of investing in bonds.
Let’s spend some time in looking at some more important bonds in circulation in the economy. The first type is the minutes for bond. These are issued by the U.S. Guard and local government. And some if not all municipal bonds didactical bonds. The next day the general obligation of the year once was a bag full of food or the taxing power of the issuer. This means that these bonds are not generally safe in order to be of the obligation.
The government going to raise taxes and bid them off. The next form is that revenue bond bonds a should be not a took on big major projects such as building bridges et cetera these bonce be principal and interest will be if a sufficient level of free we knew was generated from the project does increase the risk of such.
Once the lastborn debut will discuss the Treasury bond these bonds are some credit for do us risk free bonds or instruments they’re called to as timely interest and principal payment is baghban the full feed of the U.S. government which is considered to be default free.
You should however be nordwind and almost all take your dues gain some degree of risk even though treasury bonds are because risk free investors of such instruments. Do fear some degree of credit risk distress because Howard negligible risk is an important consideration. The danger of investing. There’s always a fear of losing one’s investment. Having said that we move on to see the types of risks. There are fears by most bond investors.
Bond Risk and the Risk Management Process
In most generic terms risk is defined as a potential of gaining or losing something of value. This could happen due to factors beyond our control and also due to factors that could be controlled. In the financial world there’s a high probability of gaining or losing money.
As mentioned earlier it could happen due to factors that are driven by the market forces or some that could be due to inherent carelessness. Whatever the case may be as a financial analyst one must understand the risk involved and set out to mitigate the risks and control the outcome. The first step in risk management is to identify the risk at hand.
It was a total knowledge of the organization’s strategy its products and services and the environment in which it exists. I did figure in required and logical approach to ensure that all significant activities within the organization had we identified and all risk flowing from these to a D undefined.
The next step is to analyze the risk and understand what the potential implications are what’s decided it is the job of the risk manager to either accept or mitigate the risk. In the case of risk acceptance no actions are taken to effect the impact. While the ghis of mitigation redo steps are taken to halt or reduce. I do we do you wish to risk advisers.
Or the beta of time. Risk management has the wall as an bodhran field of finance. The tradition of practices of risk management was to protect the organization from losses. However the new approach to risk management is about managing board. The downside and the upside by doing so domination defines the risk appetite in the form of a policy and has a team of risk professionals would board and monitor risk on a timely manner.
There are three major forms of risk the financial institutions are subject to do. The first one is market risk. This type of risk refers to the possibility of loss of investments. You do changes in market Barometer’s such as prices interest rates currency prices etc.
For example if the price for gold in Ford’s standard was money if you tried to sell it. Similarly if interest rates change. There would be a change in the price of a bond. What do with the case may be. Such changes could be positive or negative and analysts should be prepared. The less type of risk give the credit risk. This is a very common risk and most of us have already faced it in our lives. Have you ever lent money to your friend with the possibility of never having to see that money back. This can also happen in the financial world. Banks and financial institutions lend money to people in exchange for interest.
There have been several cases of such people defrauding underpayments and not returning the money back to the bank. The toad type of risk is known as Operation risk who’s had the due to inadequate or feel internal processes people or systems.
Let’s look at an example. Let’s assume you are buying a share online horror and just before you click buy. The bar goes off when the bottom comes back on. The prices have moved considerably and you’ve lost a profit opportunity so you can see how you feel you do have a bar back up has got to New Jersey. Risk coming audiophile processes can cause a large loss here.
There should be adequate investments in fixing the process drilling the people and checking the systems. Bonds and the financial products are exposed to the risk of injury losses if either party fears to follow the rules then there can be lost to the body.
So I’m really digging to be out with price and interest rate movements causing adverse changes in the market value of the bond. In the case of fixed income products the most common risk is the risk due to the effect of changes in the prevailing market interest rates. We have learned is that when interest rates rise the bond value falls.
Any changes to the dangerous streets can change the bond value add was Lee. Distress is measured by a factor known as duration dudish and is mathematically derived and is outside the scope of our discussion. The next risk is called risk. The last lecture we have learned the god provision of a bond when interest rates Ford dealer sure had the option of calling the bond to do so.
The studio got Price called risk arises from the fact that an interest rate for the investors money would be done and he or she would have to reinvest it. A new law and market rate. When interest rates are more one day. But Bonds had relatively more or risk because of an increase probability of getting called bonds that are not gullible have no core risk in the basket.
We have all seen that the issuer has the option of joining the investor’s money earlier prepayment also increases when interest rates fall. Like in case of risk the investor would have to invest the money at a lower market rate. Having seen the major forms of market risk we moved on the next major type of risk. That is great risk as discussed in the previous lecture.
Great Risk is a risk that you share the bond but not honour the payments of principal and interest. Back with the investor. This risk is a function of both the ability and the willingness of the issuer to be bags of money. Great trading companies measure this risk and assigned reading so such issue as major rating agency such as this and B and Moody’s are signed literally trading stood ignored the creditworthiness of the issuer hide the reading but the chance that the issue of valere returned back a money to an investor in another form or risk the liquidity due risk in the financial world liquidity differ to the degree at which an asset or a security can be quickly bought or sold in the market.
We don’t know effecting its price. If you wish to sell your car and have hundreds of buyers lined up there is a higher chance that you will get what you got into cash at a good price. This is a liquid market. On the other hand if you have all you one buyer you don’t have much option to negotiate the price. Such a market is illiquid. You could do risk because then you have to buy or sell your fixed income product I have less than the fair value of the security due to lack of liquidity by making investments. Investors should keep an eye on liquidity and prefer markets.
There are many buyers and sellers but there are certain bonds that build interest rate in a different currency. With these instruments there’s always a risk that the exchange rate would move in Edwards direction. Such risk as dollars a senior at risk. Besides these type of risks there are the risks that are beyond one’s control.
Your current offered disaster or the start of a war going to sub the natural events and can cause losses. Being an analyst wanted a con for all the risks affecting wants position and keep reassessing Doug grunt’s of numerous. What should make efforts to reduce the chances of a loss so that everything goes as planned and in this one manner.
Stocks and Shares
Having seen the bond market we move on to the next important financial product. We have seen this product before and as issued as a certificate of ownership you off lending money to companies such a product has called a stock or a share in the finance world stock share at nuclides mean the same thing in Berlin and simberg Don’s stock in the share in the ownership of a company who represents a gleam on the goblin’s assets and earnings. The more you invest die it would be ownership. By investing money in stocks you become part owner of a company.
Doing so gives you a share of the profit generated by the company. Such excess income is distributed to the shareholders. Why are dividends or need the company stock or give awarding rights to elect the board of directors and hold meetings so such Gerard does make important decisions and what with the company’s management to increase money for their shareholders shareholders Andre doan’s if the company is successful but they all stand to lose their investment. If the company isn’t owning stocks hover over it limits your liability to the investment.
This means no matter what the maximum amount you can lose is the value of your investment. If the company goes bankrupt you can never lose your personal assets. In the unfortunate situation of a bankruptcy we have seen that a bondholder gets precedent’s and they would receive their dues by selling the company’s assets. What do and what remains is bid odorant equity shareholders in a few lessons from your view visit this topic and drive to see if there are any reason to mitigate this risk.
There was never admit as to buy your stock in order to do David’s fair value. Look when we see fair value it is not the market price of a share. Fair value and you’d then hound you to ration an unbiased estimate of the potential market price or for stock. This is what the price should actually be Ford the market spins be here rationally.
However in the real world all market participants don’t be here. Ideally there are instances where the market price deviates from the fair value fair value as does the rough estimate of the price should actually be. It allows the investor to determine if a particular stock has overvalued or undervalued the market price is significantly higher than the face value.
Then down list the stock as overvalued and recommends a selection on dude around the market price is significantly lower than the fair value doubtless termed a stock as undervalued Andrew komenda by action. Fair value. Does the white hood concept remember when researching forms and finding stocks that are significant and prospects.
The fair value system we did using said Riddick nehgs the first technique uses the same principle as a net present value of a series of cash flows. Predictions of future cash flows and profitability of the business is discarded using an appropriate discount rate. This technique is just called the discogram gushed look or the DCF method.
This technique used to trim board the income statement and the cash flow statement to arrive at a domino no negative free cash flow. In the simplest form the free cash flow for a particular period is defined by subtracting the operating expenses and taxes from the lefties and then further reducing from does the capital expenditure for the form and the changes in working up.
Before we move ahead let’s dissect this formula see what is actually happening. If you recall Netis or breeding expenses and taxes I look at it on the gabonese income statement. Capital expenditure can be formed within the kashrus from investing section on the gastrell statement just represents the money spent on acquiring fixed assets such as land building and equipment.
June and bookchin gupton can also be fallen on the cash flow statement. However it does present on the cash flows from operations section walking represents a difference between the company’s current assets and the current library dues.
The change in working capital of from one you to the next is degree lets one know what investments are made towards but using current assets and the gadg integer from different languages in India. So if you try to analyse a free cash or form. What does is essentially doing is digging the net income owned by the company and then reducing from it the company’s expenses towards buying longer term assets and net short term assets.
What do a money remains. It’s a free cash flow for a form. This is very similar to what an individual will have left after subtracting want expenses from the dicom salary. The free cash was does the gas synergy from the company for board the creditors and equity shareholders. No doubt you don’t remove the interest of montrel linnets is to arrive at the free cash flow.
This is not done to ensure that the free cash drawer includes the bond claim as well. In delude stooges who see how to remove the bondholders scheme to have said the equity holders scheme only in order to find appropriate discounted use vac you have studied vac in the corporate finance section and as gangling are using the company’s capital structure and its cost of boring goods and debt to magically the fair value can be calculated in five steps in the first two steps. The free cash flow and the vacas do to mind.
This is done using the form discussed and digs input from all the statements published by the company. Here we make an bodhran assumption that the life of the company is for a few years and recovery projects.
Daschle was till the end of the company’s life in Detroit. Deb the projected free gastro was of the form his discounted using the vack to add I don’t appraised value in the form don’t appraised value reflect the market value of a business. It is a sum of all the claims by all the Cleamons namely the creditors and the shareholders. So in effect does enterprise value includes a debt portion and it has to be removed to arrive at that it could do but only.
Hence the equity holders claim is the enterprise value. Mine is the market value of the debt portion. The last epistrophy of Ida acquited gleam by the number of shareholders to arrive at the fair value share. Let’s look at an example. ABC Ltd has the following figures from year 2016 to 2021 yet at present a year 2016 and we use projections twistin would donate to operating expenses working capital et cetera for years. Two dollars. So indeed to 2021.
Making projections is a simple exercise. Yet an art requires want to make several assumptions about the company. Some examples such as options other than let’s see as we grow at the same rate for a few years and then followed by X percent. Well simply that admitted mail.ru are the same route to the end of the life of the company.
Such assumptions are based on torro analysis of the company’s business model and its operations and comes with the little bit of practice. Hence using our assumptions we arrive at the values for all the inputs to our free cash flow or formula for years to Don on 17 tootles in 21. The next step is to use the free cash flow formula to arrive at the few gas rules for years to Don so in to do others 21. Nor do a few things here.
The gingered worgan group do did date for the difference in the working capital from one year to the next. For example they use two dozen 70 gauge in working capital is excluded as a difference in booking gap from year to gone 16 to two dollars 17.
What’s the norred years option that the company released to Google’s in twenty one and hence the projections are due to dollars a new one such as options are purely based on mindless expectations. I use to simplify calculations.
The next step is to carry the rack for a form looking at the capital structure for your 2016. The company has an equity gatrell of 2000 dollars and a dead couple of dollars in dollars. The cost of debt is 5 percent and the cost to equity is 8 percent. There are 300 outstanding shareholders at present.
Assuming a tax rate of 30 percent you would like to remind the companys fair value. We already had the free cash clause for all the years mentioned in the previous table. Using the capital structure we go through the rack a six point five percent discounting each cacharel by the whac we arrive at the enterprise value of two thousand six hundred seventy dollars. If you recall this enterprise valued at the claim on board the debt and equity holders.
From this we subtract the debt of Todd and dollars to arrive at the gleam of 1617 dollars dividing this amount by the number of shareholders. Rigged the fair value for five dollars and 50 cents. This is the fair value of the stock in the endure that you took on 16 not the DC of Medicine has its problems. You probably must have noticed that the entire Cash flow is based on the projections made by the analyst. Most analysts have different assumptions and hence are over different fair values. It does bring to arrive at a price range based on different assumptions.
The next problem with the DC of red is the discount rate used. We have discussed this before the back can be adjusted up or down based on dogies good use of the project. Just to add a level off centre Inde and base then time model on resumptions. Lest look get a second metter not similar to the GCF meter and you also have the different is gone method.
This method discounts a driver is on the Cobbly by the required read or for done. It is basically a more conservative because in the discounted cash flow analysis the EM approach seeks to value a stock by using the predicted do good points and discounting the bag with the present value. The idea is that when you buy a stock only gasohol you receive directly from this investment decks picked to dividends the dividend has gone more builds on this and argues that the value of the stock should therefore be the present value of all.
Expecting dividends or put down. To discount it. In this case I don’t expect it from a stock of some Ludus profile. For example if Cobbly and company B are of some lower risk dindin have done generally from company B and B use as a bedbug discount rate for accomplis. I know the simple method of gathering the fair value is a good bedbug method.
This is based on the principle that’s similar to production of said jassam lower price. If two companies are compatible in every respect that is they operate in the same industry they have similar learning. The profits are similar etc.. Didn’t the braces of the DOS docs must be similar in order to find a fundamental price down lustig’s the whole book Free was so more the common has used are the price to earnings ratio the price to book ratio and a price to free cash flow ratio to find a fair value.
We simply might have had that issue of the comparable form with the correspondingly non-zero value of the actual form. For example if you wanted to find the fair values in the B issue be multiplied the be the issue of the compatible form we do earnings per share of the company in question. Do I budget as fair value norred the letter E in the bead issue.
Did your earnings per share. Before we move ahead let’s look at the big issue in a bit more do you do in the beed issue is the issue of the stock price of a company to earnings per share of the same company earnings per share already. Yes. Is a more true value of the earnings but outstanding shares are for company. It is nothing but the profit shed of each shareholder in order to get rid of the EPA.
We divide the net income by the number of outstanding shares. If the company’s net income is 10 million dollars and the number of outstanding shareholders is one million then each shareholder had a share of ten dollars in owning porn. The business has those 10 is a price that the share of this company’s hundred dollars did to be. The issue becomes 100 Do I read down know distend. As a side note be reassures you to do dominy for companies or valued or undervalued. You have to combine two forms if one form has a higher b Horatio than that for MS. don’t bedsore overvalued compared to the better form.
Having seen the speed issue lazily visit the valuation dagny. After Torah research has been found and company and company B are compatible forms company B is very created in the stock markets and as a defining share price. Using the company’s financial statement we often know that the big issue of company B is down. Company is not a relatively low stock and does not have a very defined stock price. It has an earnings per share of aid which going to be gaggia and using its financial statements which blamed the beta issue of company be redeemed because of company we had over a fair price for me as G dollars.
Applying the same concept go to an over the fair value using though there is no such as the price to book ratio and the price to free cash flow ratio. Even though the comparable method looks like a simple approach. The complication lies in finding a true and better company. Valuation is just more of an art than a pure science our lives who work in the industry of valuation use a judgment about selecting discount rate projections compatible companies and good gracious instead of what I having at a single value. Do work towards getting a price range.
If the stock price is below that range the stock student’s undervalued. Why did the market price is moden the range. Did a stock as judah’s or valued in the next lecture. You have a look at the equity market as a whole. I understand the dynamics and why share prices are constantly changing.
Equity Markets and Stock Indices
Just like the markets were buying and selling groceries. We also have a market for buying and selling stocks. The place where the stocks are traded is call a stock exchange began to be physical places or what you’re guiding spots.
You know as you to the buyers and sellers are matched and you have trade disputes between the two bodies. Few of the famous Dr. shoes Nemes are NASDAQ the New York Stock Exchange and the London Stock Exchange. If you recall you have discussed US stocks I should buy companies has a certificate of ownership in your money invested the first to offer stock which are issued by the Broward company.
So if it’s God the initial public offering or die before wants the stock has been issued for the first time in the primary market. The stock is dendreon in the secondary market secondary market can be treated similar to a second huntercombe market whereas the primary market is where the car has been sold for the first time in the world of stocks and bonds. The secondary market is a very bodhran draw and it is here where the stocks are trading and the prices go up and down based on the market expectations. In a section of micro economics we have studied the concept of supply and demand.
The world of stock in the weird world example of this concept where demand raises the price of a stock raisers. Similarly when the supply outstrips the demand the price of a stock falls the next question that arises is what creates demand and supply. When the stock has issued for the first time the investor must somehow some sort of expedition’s he or she must have expected that the company will grow its earnings and Dustin don’t generate wealth for the shareholders. Some don’t such expeditions are fulfilled by other dames.
The investor believes that the good Prudential has abused and it is time to recover disinvestment. This is where the secondary market comes into play. This market tries are investors expectations or be are not like some believe in a company’s business model and would like to invest more money. While others may want to jump model the investment ever moved.
What would the case be. The secondary market gives a platform for buyers and sellers to meet and exchange stocks at a defined price defined by message to mind by the forces of demand and supply. The price had wished to buy demands. It’s called the bid brace and the price had to be made to sell offers. It’s called the ask price.
There’s often a difference between the bid and the ask. And the difference is called the spread. As a buyer what dress to build a bracers down and as a seller one would like to put a price as higher. You do this. The big prices always list and ask price when the buyer and a seller agree on a price and a treat all goes with the number of buyers increase.
Does a buying pressure on the stock and the prices are bid up. On the other hand when the number of sellers of race selling pressure causes a stock prices to fall. Now what caused the buying or selling pressure to increase. We mentioned earlier the stock market is full of people who would expectations would a large number of people expect positive things to happen and the company started buying the stock and increase its price in the process. Let’s as you do wish to buy the shares or for crude oil gambling.
At present the company is doing well and its stock price has traded at hundred dollars a share. We were named the company makes a stunning revelation that it does follow new ideas and that what drew bullets production from the current levels hired the production higher would be the revenue higher would be the net profit.
With an increase in earnings the prospective shareholders would hoard would put you the shares of this company seemed as positive news. The seller would not send us dog out to see embrace this would cause the buyer do accept a higher price and this would lead to an increase in share price. If on the other hand the company announced that an oil wells have dried up and would reduce production considerably the sellers would hoard up to sell their shares. This would put downward pressure on the shares as the price would tank and supply and demand is the basic idea behind price movements in the stock market.
Some price fluctuations increase or decrease the shareholders vote. So far we have looked at an example of one particular stock. The market is full of stocks and shares of mendable companies in order to drag dragged expectations of the general market. Some specialized companies design in dicers that would drag the general expedition of the stock market the most gender form you described as a median average or for selection of sample stocks in order to pick the stocks next SCOP me select drop performing companies from various sectors industries doing so did because selection of companies from the overall market.
You don’t give the company a raid based on their risk and done relative to the Indian market. The final index is calculated by adding the product or the rate and the stock price does gives a single lumbard that as a reporter and has the price changes so does the index. When a majority your share price has fallen the index falls to does.
But in the index one can get a good idea hold or read market as performing. There are some blown dice such had their son been dicers D in diceless track media stocks in the U.S. and also in the ward. There are also indices there are localized to a particular region and also some indices are look close to a particular industry. Whatever the case may be indexes are helpful and at times give one a sense of hold economies performing as a whole.
Just like the bonce does a financial address going to wall in Hualing equity just by the popularity. Most people don’t fully understand stocks. There are people who keep away from the stock market while there are others who unnecessarily dig on huge risks in this lesson listen we have a look at the risk of investing in stocks and see metal door wide and matu GOOD such risk while investing in stocks. Investors make money.
Do raise the forces by means of dividends. And the second is by price of precision in the secondary market. Some companies build dividends and some don’t. So all option left is for the company to make right decisions and grow year on year. This would make the company look strong and buyers would build a strong Brace up. There are however several examples where companies make wrong decisions and invest in projects that don’t increase shareholders well.
Doing so can cause them to make losses and eventually become bankrupt in such a situation. The price had to stop at Ford to zero causing the investors to lose the hard earned money in order to protect oneself from such a risk. Investors must conduct due diligence and study the financial statements order. Peter tough down. Unfortunately despise dis. There are examples of how discoveries that are made wrong decisions and have lost value over a short period of time.
In such a situation it makes sense for any investors to buy shares of more than one company. This strategy is called diversification. There’s a higher chance of losing your money if you have invested in all you want stock. However by distributing your money to different stocks you would mitigate the specific risk. The general guideline in investing more than seven companies diversifies once portfolio and Moody’s gets distressed.
You can also choose companies from different industries sectors to diversify sector risk. Besides this some risk there applied to bonce also applied to stocks. We have seen market risk before this is a lost cause you to outdo Osprey’s movement. We have also seen liquidity risk. Not all stocks ibeyi trader and there are some that have few buyers and sellers who just adore it so stocks you a need for immediate funds selling stocks would cause you loss.
We have seen various golio doctrines offer a disaster a war going to stop hildi companies production. Such issues continue for a period of time. The company would eventually closed on causing the stock prices to crash. Being an analyst what you look on for all these risks are affecting one’s position and keep reassessing for the occurence of new risks. One should make efforts to reduce the chances of a loss. Every effort should be made to protect the investment so that one doesn’t have to compromise on one’s goods.
Having looked in equities and bonds you just down to look at another important financial product one social media product is called the mutual fund mutual fund is a managed investment fund that collects money from various investors. It then uses these funds to put security such as stocks and bonds. This collection of stocks and bonds this is a effort do us a portfolio. Some mutual funds purely invest in stocks. I know an effort towards equity funds the ones that invest burian Bonds are gold as debt funds. There are some that invest in a mix of equity and debt such mutual funds acquirer’s balance funds.
The price of a mutual fund is known as its net asset value or the of discovery. Why did a mind a total value of the securities in the portfolio and dividing by the number of the funds outstanding investors. Now if you haven’t guessed the price of a mutual fund does remain static it goes up or down based on the price fluctuations of each security in the portfolio. The person managing the board of securities is called the portfolio manager and as entrusted with the money of many investors.
It is the duty of the portfolio manager to fully analyze the buy and sale of gods made by their assoc. team and to pitches or sell securities decisions because the envy of the mutual fund to forn causing loss to the fund and the investors. Mutual fund investors receive units in exchange for the money each unit represents a smaller portion of or a ship in the mutual fund. If the envy is ten dollars by investing two hundred dollars you end up buying 20 units of the mutual fund. There are merely two dips of mutual funds.
The first one is called open ended fund. These are the most common types of mutual funds. There is no limit on the number of funerals. One issue when an investor but you have units in your mutual fund more units are created. And when somebody says his or her units Denise are you going to hold off circulation. If there’s a high number or by request the fund manager invest that extra money to buy more securities. Similarly with the number of Senate requests increase the fund manager will need to take your dues in order to be back money with investors.
Has the end of each trading day defined as price based on the amount of shares bought or sold and the end of the price. In contrast to an open ended fund a close ended fund all issues a fixed number of units does a similar to a dog that has been issued for the first time we have seen that once a stock has issued. It trades in a secondary market similar to that closed ended funds are priced based on the supply and demand allowing it to trade at prices above or below its envy. We have seen most of the features offered mutual fund.
However one question remains unanswered. Why do people buy mutual funds if Dick and buy stocks and bonds on their own were dancers of mutual funds provide a lot of advantage compared to direct investing. For an average small investor mutual funds going to be a smart and efficient way of investing. Most of us are not well-informed well simply lagged expertise of picking winning stocks.
Some of us may be too busy in our lives tracking the market movements on a daily basis Mesi me boss. Mutual funds odds US problem. You got a professional manager to manage your funds for you to put full of marriages better informed as a technological edge tredegar and wantage of market movements. Another media advantage is a buy or diversification section of it could you risk Mr.
He does some risk to be removed simply by buying more stocks so mutual funds will well over 100 secured deals with the budget of two hundred dollars you cannot really matter diversification of him which I find. However you can definitely buy unit and the find with a well diversified portfolio of stocks and bonds. Besides this a few in which you have funds offered daks advantages why I assume don’t offering great returns.
Generally most mutual funds are liquid suggesting that you can easily enter or exhibit such funds. With this be complete dissection and mutual funds so far we have discussed in what’s known as blynn Malala paradox. In the next lesson we will discuss two products that are treated very frequently in a comparatively complex such burdocks divide the value from plain vanilla products. No no no derivatives.
Introduction to Derivatives
The book is definition of a David of a financial product that divides its value from the performance of an underlying entity. Do you see a need for examination. The first one is a dome underlying And the second one is what did the what did I mean the underlying off a derivative is an asset a basket of assets an index etc.. So said the cash was the derivative depend on the value of the underlying. Let’s look at a hypothetical example. Let’s say we have a product whose price has giard to mind blowing the stock price or MicroCell by to use such a product’s sprays. Is it to my mind the price of the underlying which in this case is the stock price a stock base has done in dollars. The Denver price is 20 dollars amman’s the stock price is 20 dollars.
The price of the derivative is 60 dollars. What we saw here was a simple matter medical and multiplication. Just to demonstrate the concept in the real world or David who has complex modules which transforms the underlying price in order to drive the price of. Don’t get rid of those sort of and market inputs of such models under delivery just brace with change based on the changes on the underlying price and the change in other factors. Keeping that concept in mind let’s look at two both predate images.
They’re known as futures and options futures is a contract with you know buyer and seller. Where in the buy is obligated to produce an underlying and a sale is obligated to so the underlying predetermined price at a future date. Let’s break up the ascendence to increase understanding. We learned that futures as a derivative unlike every derivative. It must have an underlying underlying game being an asset and index or simply another getting rid of.
When the price of one lane changes the price or the derivative of is change in Gears or futures obligation is to buy or sell an underlying this means that got me. The buyer has to honour the contract by buying the underlying undersells has drawn to the contract by selling the underlying underlying is an equity. The derivative becomes an equity future. So really if the underlying index is such a derivative becomes so index hooja the bodhran think to naughtier of the dead verge of has underlying the next important thing to see is a mention of the don’t predict a mind price and pre-determined future dude.
The would be to mind. So just as a future price of underlying his already mentioned in the contract and the future did not do what they did when the contract expires and underlaying has to be bought or sold. No the question arises how does one know the future price today.
This price is right from the price using a match to a medical model. Here’s the name of it. In the most simple case it is the amount of money that one would have by selling down delaying and keeping the money in a bank in order to earn interest to the expiry date of the contract. Let’s look at this using a highly simplified example. The price of don’t langurs hundred dollars and the risk free trade off interest is 3 percent.
That’s said going to be sold to receive a hundred dollars and as hundred dollars going to be due was injured as it is needed to you hundred and three dollars in one year. To future price with the one you buy these hundred three dollars. It can be seen that the Langs price changes so the future price. This is a highly simplified example to give you an idea of the concept in real life. There are few more inputs to this equation and good use bonding as used. For now you can use above method to get an idea of how future price did to mine. This is called the North arbitraged brace.
The price of the future differs from dispraise. People can use easy methods to make risk free money on editing to understand here is that as underlings space changes over the futures price. Let’s bring this together with the help of an example. Oh yum you would do a day in one year and you due to receive one billion dollars as bench and be our postretirement. Do you decide to buy a house. We don’t have the funds today.
You decide do in doing do a contract with the seller where you would buy the house for one million dollars one year from now the current price of the underlying house is nine hundred dollars in dollars when the price of the future is one million dollars after the passage of one year the House has to be bought for one million gone. What me. You’ve had a dime of Spidy the price of the house drops to 500 dollars and then the buyer loses out. And a set of pockets of profit on you.
That and the price rises to one point two million dollars. The buyer you get to buy a house one point two million for the breeder don’t mind price of one million. No the price of future can change based on their delaying price. If not three months the price of the is four to five hundred dollars there is a price of the future Volks to Norty a doubt what’s the future has been. But she has two months back the obligation to buy the underlying. As a breeder of mine brace to Lourdes you and if the market price or the underlaying Falls is a future price falls. The buyer has the option of selling the future to someone else for a loss or he married dilks by hoping that the price would raise.
If it is embodied no doubt the price of a future or was equal to the price of the underlying at the time of expiry this was fairly into head of the door. I wish Trish Bryce we’d be the same underlying If you had expired. There is no down left and there is no interest that going to be owned. If that said was sold and the proceeds were deposited a door interest. Let’s look at an example to see what happened that expiry. We have seen that if the got in price of a house of 900 does and the future price for a one year contract is one million.
Then you would be obligated to buy the house for one million after one year. Have the end of the year if the price of the house is one point two million did the biocon by the one point two million house for one million dollars. He can also sell the future which will have the same price of one point two million. That does seem as the underlying. In either case the buyer is making a Doritos dollar profit. Another product similar to a future is a forward.
This product works on the same principle but do less standardize. I’m not graded on exchanges he gives a few jokes don’t the lines are more standardized doctors or use sort of define underlings gang futures. This is not true guess or forwards. Do random people meet and don’t do a contract to buy or sell any underlying had a predetermined price such non-standard underlings could be livestock hosers users etc.
Standard underlings are more frequently treated items such as stocks bonds in dicers commodities etc. futures are also traded formally under changes by forward contracts are entered into or the Congo that does vidaurre an exchange. Having looked at the basic definition and the principle. Let’s look at the reason for creating futures do breman uses of futures. The first one is that it acts as a speculation. Dood traders bet on the movement on their underlying and buy and sell futures accordingly.
It defeats the price of the langurs going to go up. Did the buy a future. Similarly this in the future. It defeats the underlying sprays is going to fall. If their bets are correct and and making a profit. DAVID Yes just fuji’s Highly leveraged products that means did provide a huge gain compared to investments mood. Does the good news is that of aging to the purpose of hedging is not to profit but to prevent losses are growing due to unfavourite price changes. Consider yourself to be a seller of crude oil.
You know the price of crude fluctuates a lot. You feel that in one year the price of crude oil will fall. Not a fix selling price new traduce price you don’t do a contract now if your price falls a lot. You have hedged your losses as a contracted Bres at which you would sell is higher than the market price or the underlying.
However if the price of the underlying raises you saw for loss has appraised that you will sell out will be lowered and the market price. However the price one has to be afford to be safe. We have abundance of hedges and piglia is in the market. Depending on whom the market participants will dig on one of the do. Roads have been looked at futures and forwards. Let’s move on to the next important derivative. That is the option.
The concept behind an option is very similar to a future you had to produce differs in many ways. Let’s start by looking at what an option is an option in the financial derivative that represents a contract. He should buy one body known as option rider. Do the body known as the option holder the option rider is or is a person who says the option by doing so he creates an option contract and puts it up for suit for the wife to buy it.
By definition an option is a derivative product that gives the buyer of the option the right but not the obligation to buy or sell a certain quantity of the underlying asset and a predetermined price on a breeder demanded the agreed upon price is called a strike price agreed upon. It is called the exosomes did and agreed upon and langes shares. Called the lot size. Let’s look at the other important dommes. The first one is is right and not an obligation in the session of futures.
We saw that the buy and the sale of the future has the obligation to buy the underlying. This basically means that wants to contract has entered into. One simply cannot walk away. Walking away would be considered as a breach of contract and they may be some legal implications in case of an option the buyer off an option don’t simply decide not to exercise that option and can walk away from the deal.
He’d buy the right to do so. Another important thing in case of a future is that the buyer has the obligation to buy the underlying and the seller has the obligation to. So the underlying case of an option the buyer is buying the right to do something he may decide to buy the underlying or sell it depending on the type of option he holds. Obviously nothing comes free buying such a right gosse A small amount of money. This amount is refered to as option premium. The writer of the option simply digs the other side and says the underlying to the buyer or buyers and lying from the seller.
As per the contract the rider has your obligation to honour the agreement. We mentioned earlier that the buyer of the contract buys that I do buy or sell the underlying based on Adoption Day. Having said that there are two types of options a call option and a put option. The buy an offer or option has a I do buy the underlying and to strike brace. Why did I have the obligation to that the underlying illustrate brace. In case of a put option the buyer has a right to sell the underlying.
Why did I drove the put. How does your obligation to binyon duelling. Based on this be considered as a buyer for call option bets underwriting browser the underlying. The price on the underlying grazer’s is a book describes brace the buyer of ID be able to acquire the stock for delore strike brace. That is the brederode mind brace and then sell it and the market price for a profit. However it dennet Length stock does not does above the strike brace on expansion Dode adoption by exercise is great and simply lose the premium bid for the call option.
Let’s pause for a minute and some raise the boveda hope of an example mr. gates feels at the price of Apple shares in Ford sharply from the current price of ninety five dollars in order to fix the selling price of his shares he date a contract that will allow him to sell 50 units offers that puts stock at 100 dollars a month from now here have you defined as that not so. Hundred dollars is as Frank brace and ninety five dollars is the price of the underlying which is the Apple shares. After drafting the contract he puts it up for sale which is what by Mr Cook who is the option buyer.
This contract for you given the right would not the obligation to buy 50 shares of Apple and a strike price of hundred dollars. If you haven’t guessed yet this is the kiss of a call option obviously the buyer has the expectation that the price will rise more than a hundred dollars in order to dwindle into such a contract. The buy of dubious more with the rider. Yes as the price bid is five dollars per contract. This is the price of the option and it’s called the call option premium.
If mr. Cook buys one contract for five dollars he gets that I do both of you underlaying shares out 100 dollars each. On the other hand if he buys two contracts he would have to bid dead dollars. I mean you decide to buy 100 underlaying shares and hundred dollars each. As mr. Cook has bought one contract for five dollars. If the dime if exercising is the right the price of Apple stock rises to 120 dollars mr.
Cook will buy 50 shares at one hundred dollars each by shelling out five thousand dollars and can sell their shares at a market price of one point two dollars each thus making a profit of twenty dollars. Bush share a good profit of thousand dollars. Mine is a premium bid that has five dollars. If mr. gates has right and the price of Apple shares falls sharply do it you dollars. Mr Cook is not under an obligation and has a right to walk away from the deal. All you losers is a five dollar premium.
MR. GIBBS On the other hand it’s still left vidio shares of Apple now priced in dollars each and gets to keep the five dollar premium bit as a start of the contract. Put Option walked in a similar fashion.
Where did I differ used as the price of the underlying Madres and drafts of contract to buy X number of shares or the underlying how to Strake brace. Let’s revisit or example I’m here. Mr. Cook feels that both stocks will rise from the current price of ninety five dollars to 140 dollars in one month and write a contract to buy 50 shares of Apple Inc. Out a hundred dollars each.
At the end of the month mr. gates on the other hand is bearish and fees that the price would fall or remain below a hundred dollars. He buys a book contract from mr. Cook. This is hold the put option really work the brace for tweaky dollars. Then Mr exercises is right and profits by selling the stock at hundred dollars each. Who’s gera in mockery of your dollars.
The profit is twenty dollars times a lot says drudgers one dollars and dollars of course from proffered. We also have removed the premium bid. Did I add the net profit. On the other hand if mr. Cook is right an Apple shares raise us to 140 dollars.
MR. GIBBS we’d walk away from the deal. The maximum loss he suffers is a premium bid to buy outright. Mr. COOK We get to keep the premium only been dead if it is a risky burdocks if not used correctly or for speculative actions they can easily it Old Ones where it did I mean many cases of banks getting destroyed in a matter of months once as she is. Is that true.
Beddings bank this was an established profitable bank. However the highly speculative actions of nickleson one of the banks traders cause the bank to suffer huge losses and then to shut its operations. Would this be country would have topic on debt widows in the next lecture. We have look at audit of investments. Disparate I don’t fit into the definition of convention assets such as stocks and bonds were refereed by investors due to several properties.
So obviously financial products fit the conventional definition with the exception of derivatives. The products discussed so far had been simple and popular among the large and small investors.
I’m known to generate dusenberry dollars over a period of time such products are known as ordinate of investments and include assets that are not part of the conventional investment types such as stocks and bonds such products are normally treated by institutional investors such as mutual funds and insurance companies and awarded by small investors. You do the complexity or liquidity concerns. Examples of such investments include but are not limited to cudmore a d such as oil and metal had been dings in antiques real estate proud liquidy etc.
There’s been a huge good distorted view of market as it provides one nice diversification to middle gives busfield risk. It has been seen that Sir George Mujeres performed well at times when conventional investments stalled. This is because such investment just wanted different drivers compared to stocks and bonds. Hence investors often include such investments or should be dreaded lawbooks in damage compared to the conventional investments.
One of the because drawbacks delivered it to most ordinary does is a lack of liquidity. It is virtually impossible to buy and sell aurealis dude just like you buy and sell a stock. Hindis investments. But she is about institutions with a longer time horizon and less need for liquidity. The longer the time horizon the higher are going to be the percentage rate of dogon of investment in the portfolio.
In this lecture. Very briefly look at a few such or derivative investments. The first one is private equity. Private equity firms typically raise funds and dig gap from board non-use to douchiness and institutional investors. The funds will then be used to police investments in promising start to private companies. Some Stardoll don’t take the company public by fielding shares did do so.
Door wide of course to an IPO or simply door why diluting the ownership. Instead approach a private equity company to receive capital for dingly should cost an operations sometimes I started to become stars and give investors usually don’t. However on several package in some start-ups shut down and the money is lost goodo survive such risk.
Private equity firms invest in many start-ups so there is because diversified disc is similar to the diversification strategy you’ve seen for conventional investments by diversifying. One element expressed fear risk even if one form doesn’t perform and it could still be a chance that other start-ups could help been recovering the losses once the start-up starts to mature.
Brown quickly forms the Lord in my Buhl to receive foreigns in view of the shares of the company. It is needless to say that the funds received many Dems largest initial investment in the start-up hence beef was not only recovered the investment dollars also make a lot of money for themselves and the investors in the BE fund. Brown liquid forms also said that a mature start-up companies two larger companies in order to make money browde a good deal generally classified.
Based on the stages of investment in most companies that require funds at start-up. We also see venture capital as well and more specialized in funding early stages to grow streatch completes the next type of ordinated of investment is a hedge fund. These are very similar to a mutual fund as a pooling investments from various investors and investing money on their behalf. How would the key differentiating point the product and the strategy.
These hedge funds invest in several that had diverse ranging from distressed assets to complex did a dose and dig on several strategies based on their views. The positive side is that such funds are comparatively liquid. We’re on the donside hedge fund all to and ought to be very risky with investors using them by money. If the strategy doesn’t work today but what an investment is real estate This consists of the sea but cheese and rent of land and building.
This can be for the classified as a residential and commotion. Residential properties are used by individuals and families to reside not for business use the ladder on your door and use by business has to generate revenue. Examples of such. He grew shopping malls would doze off as complex whose. Really stupid is a dynamic market. The price of a property not only depends on the generally gone me woodwards order property surroundings and it’s mending. This market has also limited in terms of liquidity. However in the long run real estate has given some handsome returns.
Also during times of high inflation these assets increase in price and rental value thus giving the investors some degree of inflation protection. The last productive discussion is commodities. There are several ways to invest in commodities suggest crude oil metals livestock etc.. Once she is in direct materne does deals with investing in stocks of companies whose business is rewarded on these commodities.
For example if you buy stocks of British Petroleum whose primary business is that exploration production and iframe wind of crude oil is done this could be done in indirect matter of investment. I read the matter and to directly buy and sell commodity futures from the market you saw earlier futures a contract are obligated to buy up or decided to buy or sell the underlying commodity price and a certain date by buying for example gold futures.
You’re obligated to buy a certain Gorger you have ruled out a certain price in the future. You are not going to do much due diligence. What was stress on the importance that commodities have traditionally been known to be excellent diversification instruments adding instruments to one’s portfolio could offer one some degree of safety and efficient production. With this we conclude the section of financial products the geeting to remember is that all investments have some sort of risk associated with themselves. The higher the risk the higher dividends expected by the investors. It is also prudent to diversify one’s portfolio.
A good mix of security such as bonds stocks and order of investments can insure that the portfolio is robust and group performed well in most type of market conditions. Before we got through discourse I would stress on the importance of reading financial news and basic books and finance by completing this course you would be more prepared to comprehend complex financial concepts. However make sure that you fully grasp the basics first. Thank you for choosing this course.
I hope it was interesting for me. And fulfil your objective. For now it is an exciting and dynamic world. Not only should you continue reading but also you should be abreast with the latest happenings. Thank you once again. In the end I would sign off my seeing Welcome to the exciting world of finance.
QnA on basics of finance
Finance basics for beginners
To understand finance properly, one needs to have a solid grasp on the elemental definitions and techniques of accounting. For being able to keep track of the following chapters
The balance sheet is a financial statement that represents an economic agent’s (a household, a company, a bank, a budgetary institution etc.) wealth by two approaches. Assets are listed on the left-hand side or asset side, resources financing the assets are listed on the right-hand side or liability-equity side.
The balance sheet is always in balance, that is: ASSETS = LIABILITIES + EQUITY When constructing the balance sheet, assets are listed first, then liabilities. Shareholders’ equity is always a residual, i.e. it is the difference between assets and liabilities.
The equity of a company or a bank is frequently referred to as capital, which can lead to misunderstandings. In this context, capital is not a pile of cash that can be invested. It is only a notional entry that shows what would be left if all the company’s debts were repaid. A negative book value of the capital means that the company is insolvent in the long run, i.e. it cannot repay all of its liabilities.
Types of finance
- Personal Finance
- Corporate Finance
- Public Finance
- Trade Finance
- Instruments in Finance
- Interest rates and spreads
- Yield (coupon payments, dividends)
- Financial statements (balance sheet, income statement, cash flow statement)
- Cash flow (free cash flow, other types of cash flow)
- Profit (net income)
- Cost of capital (WACC)
- Rates of return (IRR, ROI, ROA)
- Dividends and return of capital
- Creating value
- Risk and return
- Commercial banking
- Personal banking (or private banking)
- Investment banking
- Wealth management
- Corporate finance
- Mortgages / lending
- Financial planning
- Equity research
What is finance
So Finance with that strand of economics that specifically deals with money and money related instruments.
It has to do with all the corporate decisions that are made by firms that want to fund their investments it also has to do with all the assets that are traded in the financial markets.
Nowadays in recent years the financial industry has grown tremendously and has become a much more central part of the entire economic system as such it is able to influence everyone lives in a direct or indirect way in addition.
Because of the variety of financing crises and scandals that have erupted over the last decade there is an increased demand for individuals that are both well equipped with financing novels as well as principled and ethically robust.
Basics of finance pdf
Basics of finance ppt
Basics of finance ppt
Finance is a management of money and other valuables, which can be easily converted into cash. • Finance is concerned with the maintenance and creation of economic value or wealth.
Personal finance is a term that covers a step-by-step guide to managing your finances and planning for personal financing and savings and investments. These include budgeting, banking, insurance, mortgages, investments, retirement plans, and tax and estate planning, banking, budgeting, loan debt and credit, rental or purchase, retirement, insurance, taxes and more. Personal Finance Definition Personal financing is all about managing your income and your expenses and saving and investing. Get all the information about the asset
Basics of finance book
1.The Intelligent Investor: The Definitive Book on Value Investing
by Benjamin Graham and Jason Zweig
2.Think and Grow Rich
by Napoleon Hill
3.One Up On Wall Street
by Peter Lynch
by Benjamin Graham and David Dodd
5.Rich Dad Poor Dad
by Robert T. Kiyosaki
Financial management means planning, organizing, managing and controlling financial activities such as fundraising and utilization of the enterprise.
This means applying general management principles to the financial institutions of the enterprise. Financial management emphasizes ratio, equity and debt debt. It is useful for managing portfolio, distributing dividends, increasing capital, hedging and monitoring of forex and commodity movements.
Financial management is an important activity of any company. It is the process of planning, organizing, controlling and monitoring financial resources to achieve organizational goals and objectives. Its definition, meaning and purposes! Definition: To make money one needs money. The life-blood of the finance business.
What are the basic concepts of finance?
The most basic financial concepts that everyone should learn
- Net worth
- Bull market
- Bear market
- Risk tolerance
- Asset allocation and diversification
- Compound interest
- Time value of money
- Banks are not your friends
- Save first, spend second
- Your interests are worth money
- Avoid all forms of debt
What are the three areas of finance?
Finance is often split into three areas: personal finance, corporate finance and public finance.
- Corporate Finance
- Financial Markets and Institutions
- The Four Basic Areas of Finance.
- Investment Investment instruments Issue new securities?
- Corporate Finance Capital Budgeting Financial Policy Dividend Policy.
- International Finance.
- Financial Institutions and Markets.
- Overview of Financial System.
- Function of Financial Markets.
How many types of finance are there?
The role of money is very important it is the backbone of every activity. There are basically 2 types of financing. These are broadly divided into finance and equity financing. These categories are further subdivided into different categories: such as short-term, mid-term and long-term. There are several options for money, depending on the amount of money you need. There are basically three types of finance: (1) private, (2) corporate, and (3) public / government.
What are the functions of finance?
Functions of Finance
Procurement of Funds (i.e. Sources of Funds) Objective: To Minimize Costs
Long Term Sources
Utilization of Funds (i.e. Application of Funds) Objective: To Maximize Returns
Long Tcrm Investments
Own Funds Loan Funds Current Liabilities Fixed Assets Current Assets e.g. Equity e.g. Debt e.g. Creditors, Payables, etc e.g. Stock, Debtors, Cash and Projects
Capital Structure Decisions / Financing Decisions
Working Capital Management Decisions
Investment Decisions / Capital Budgeting
What are the 5 basic accounting principles?
FIVE BASIC ACCOUNTING PRINCIPLES
1. Principle of double entry
2. Principle of recording
3. Principle of profit determination
4. Principle of reporting
5. Principle of control
What are the 4 principles of GAAP?
The four basic constraints in generally accepted accounting principles are: objectivity, materiality, consistency and prudence.
What is G.A.A.P?
Generally Accepted Accounting Principles are the set of rules and regulations through firms and corporations prepare and present their assets and liabilities and all incomes and expenses in financial statements.
What are the 4 areas of finance?
Basic Areas Of Finance
• Corporate finance
• Financial institutions
• International finance
What is the simple meaning of Finance?
What is Finance?
Management of Money.
Definition of Finance/Financial Management : “Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives.”
Raising, providing & managing of the funds in business.
The most critical requirement of the business.
What is General Finance?
General finance finance include financial markets and institutions, investment analysis, portfolio management, international finance, derivatives, risk management, real estate analysis, entrepreneurial finance and advanced financial management.
Who is the father of finance?
The father of modern finance is none other than Dr. Eugene Fama. Dr. Fama is a professor at the University of Chicago and a founding board member of Dimensional Fund Advisors.
What are the four main areas of finance?
The Four Basic Areas of Finance
•Financial Institutions and Markets Overview
Why is finance so important?
Financial services are really important to control over the expenses and track the finance in the right way. The main aim of this service is to satisfy the needs of financial security. The financial education services or seminars are organized by an organization that help to maximize the credit potential, protect your identity, secure your assets in order to prepare stable financial future.
What exactly is Finance?
The term “finance” in our simple understanding it is perceived as equivalent to ‘Money’. But finance exactly is not money, it is the source of providing funds for a particular activity. Thus finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government.
Why do we study finance?
Understand how and why financial decisions are made in large and small companies
Helps individuals increase their own compensations
Improves contributions to the success of the companies that people work for
Understand the tradeoffs we face in making personal financial choices and help us to select the most appropriate action
|Definition||The definition is the science of planning to distribute assets within a finance company.||Accounting, on the other hand, is the art of summarizing, Reporting and recording of financial transactions|
What are the 4 types of financial institutions?
Types of financial institutions
1. Commercial banks
2. Savings and loans associations (s&l’s)
3. Credit unions
4. Pay day loan company
What area of finance should I work in?
Some common organs for working in finance include actuarial (insurance), corporate finance or real estate, financial planning, investment banking and money management. Many of the skills and abilities required for each field overlap, and you can decide to move forward in your field or change your focus.
What are the different branches of finance?
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What does GAAP stand for?
generally accepted(agreed) accounting principles
What are GAAP rules?
Definition of GAAP /Generally accepted accounting principles /GAAP (pronounced “gap”) stands for “generally accepted accounting principles,” a collection of commonly followed accounting rules and standards for financial reporting. /GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another
What are the 3 basic functions of a finance manager?
Finance function The finance function relates to three major decisions which the finance manager has to take:
• Investment decisions
• Finance decisions
• Dividend decisions
What are the sources of finance?
What is cost of capital in finance?
- “The rate of return the firm requires from investment inorder to increase the value of the firm in the market place” – hampton john j
- “Cost of capital is the minimum required rate of earnings or the cut-off rate of capital expenditures”- solomn ezra
What are the two main sources of financing?
Two main sources of external finance are available to a company equity (ordinary shares) Imi debt (loans or debentures) or a combination of these such as convertible loans (hybrid finance), or preference shares other external sources are leasing US Government and European funding
What is the capital?
Capital in the economy consists of assets that can increase one’s power to perform economically viable tasks. For example, a stone or an arrow in the original sense capitalizes on a hunting collector who can use it as a hunting tool, while the roads are the capital of a city dweller.
What are the topics in finance?
Explore the most popular topics Finance
- Capital (economics)
- Capital asset pricing model
- Cash flow
- Cash flow matching
- Consumer debt
- Debt consolidation
- Debt settlement
- Credit counseling
- Debt diet
- Debt-snowball method
- Debt of developing countries
- Discounted cash flow
- Financial capital
- Financial modeling
- Fixed income analysis
- Gap financing
- Global financial system
- Basis risk
- Interest rate
- Risk-free interest rate
- Term structure of interest rates
- Short rate model
- Vasicek model
- Cox–Ingersoll–Ross model
- Hull–White model
- Chen model
- Black–Derman–Toy model
- Effective interest rate
- Nominal interest rate
- Interest rate basis
- Fisher equation
- Crowding out
- Annual percentage rate
- Interest coverage ratio
- Foreign direct investment
- Gold as an investment
- Long (finance)
- Margin (finance)
- Mark to market
- Market Impact
- Medium of exchange
- Money creation
- History of money
- Monetary reform
- Modern portfolio theory
- Mutual fund separation theorem
- Post-modern portfolio theory
- Reference rate
- Absolute return
- Investment performance
- Relative return
- Financial risk
- Risk management
- Financial risk management
- Uncompensated risk
- Risk measure
- Coherent risk measure
- Deviation risk measure
- Distortion risk measure
- Spectral risk measure
- Value at risk
- Expected shortfall
- Entropic value at risk
- Scenario analysis
- Short (finance)
- Day trading
- Position trader
- Spread trade
- Standard of deferred payment
- Store of value
- Time horizon
- Time value of money
- Present value
- Future value
- Net present value
- Internal rate of return
- Modified internal rate of return
- Unit of account
- Yield curve
- Analysis of the amount of money that you will need to retire in thirty years
- Analysis of nursing home costs
- Capitalizing on hot investment trends for 2015
- Effects of Volkswagen’s leadership crisis
- Analysis of jobs that will not exist in the future
- Analyzing personal debt and the job market
- Best ways to pay for education: student loans or personal loan
- Maximizing profits in a small company
- Regulations in commercial banking
- Creativity in banking
- Quality in retail banking
- How does minimum wage effect poverty?
- Identifying conflicts in capital accumulation
- Importance of risk management
- Various risk management procedures
- Strategic planning
- Emerging markets
- Expanding into global market
- Corporate social responsibility
- Term structure of interest rates
- Personal finance
- Corporate finance
- The desirability of budgeting
- Capital budget
- Cash budget
- Beginning Cash Balance
- Cash collections
- Cash disbursements
- Cash excess or deficiency
- Ending Cash balance
- Management of current assets
- Factors which influence credit conditions
- Credit collection
- Forms of credit
- Purpose of stock control
- Rate of stock turnover
- Determining optimum stock levels
- Reasons for keeping cash
- Advantages of sufficient cash
- Management of fixed assets
- Uninsured risks
- Requirements of an insurance contract
- Shared Services
- Finance of states
- Financial economics
- Financial mathematics
- Experimental finance
- Behavioral finance
- Intangible Asset Finance
- Related professional qualifications
What are the different types of finance?
Finance is defined as money management and includes activities such as investment, orrowing, nding, budgeting, saving and forecasting. There are basically three types of finance:
- public / government
Personal Finance: Personal finance is the process of planning and managing personal financial activities such as income tax, expense, savings, investment and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan.
Corporate Finance: Corporation Finance also includes the tools and analysis used to prioritize and distribute financial resources in corporate finance by managing its funds and measures related to the corporation’s capital structure to raise company value.
Public / Government Finance: Public finance is the management of a country’s income, expenditure and debt debt through various public and non-governmental public institutions. This guide covers how public money is handled, how various elements of government money are, and how it is easy to understand what all numbers mean. The financial position of a country can be evaluated in the same way as the financial statements of a business.
What are the five basic principles of finance?
- What matters is the cash flow. Increased cash value (and not accounting profit) drive value.
- Money is worth the time.
- Risk requires a reward.
- Market prices are generally accurate.
- Conflict of interest creates agency problems.
- Principles and beliefs.
What do you mean by finance?
It is the management of money or money related transactions. Money can be for savings or investments. In academic terms, finance is a genre of study.
For example, an MBA in finance, an MSc in finance, deals mostly with investing, mutual funds, hedge funding, investment, banking, etc., so finance can be defined as the study of different types of money management.
Money can also be defined as the science of money management. Money management means how money is handled, rotated and driven to make money. Finance is “acquired” by some businesses, companies, and companies in the form of stock sales or receiving investments from investors or the public.
If you are a company owner or you are managing a company’s finances, then getting knowledge about the type of finance becomes your primary goal. No company can conduct its business activities without money. There will also be times where you will need money for your organizational activities. Then choosing the right type of financing option for you will be best suited for your situation.
I hope this information helps you.