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Topics in Financial Concepts

 

Financial Capital

Financial Modeling

Time Value Of Money

Reference Rate

Right - Financing

Short - Finance

Scenario Analysis

Entrepreneur

Position Trader

Store Of Value

Unit Of Account

Money Creation

Money

Gap Financing

Interest

  

Capital - Economics

Cash Flow Matching

Cash Flow

Discounted Cash Flow

Leverage

Market Impact

Long - Finance

Medium Of Exchange

Short Rate Model

Fixed Income Analysis

Margin - Finance

Interest Rate

Investment

Return

Spread Trade

Yield Curve

Yield

Speculation

Portfolio

Risk

Time Horizon

Capital Asset Pricing Model

Microcredit

Liquidity

Mark To Market

Standard Of Deferred Payment

Hedge

Arbitrage

Debt

Volatility

Financial Concepts

Finance is used to learn new mathematical concepts and methods. There are two aspects of financial terms, i.e. what it means in the real world and what it means mathematically.

The key concepts of finance are as follows:

a) Time Value of Money:

Time value of money is an individual’s preference for the possession of a given amount of money now. The longer is the term of single payment loan, and then higher is the amount the borrower must repay. The time preference for money may arise due to uncertainty of cash flows, subjective preference for the consumption and availability of investment opportunities.

The basic time value of money relationships are:

PV = FV * DF

Where, PV is the Present value

FV is the Future Value

DF is the Discount factor = 1/(1+R) t

R is the interest rate

T is the time in period

b) Compounding:

It refers to the frequency with which the interest is computed and added to the principal balance. More frequent the compounding more is the interest earned.

c) Arbitrage:

It means the concurrent purchase and sale of the same commodities, shares, securities or foreign exchange in different markets to earn the profit from the price difference.

The interest rate or time preference rate give the money its value and facilitates the comparison of cash flows occurring at different time periods. The risk or return trade-off is the balance between the desire for the lowest possible risk and the highest possible return. Higher is the risk equals to the greater possible return. Diversification of the portfolio’s lower’s the risk of the individual’s portfolio. Asset allocation divides the assets among major categories in order to create the diversification and balance the risk.

The basic concept of the optimal portfolio attempts to show how rational investors will maximize their returns for the level of risk that is acceptable to them. According to the Efficient Market Hypothesis (EMH), it is impossible to beat the market as the prices are already incorporated and reflect all the relevant information. The Capital Asset pricing model (CAPM) describes the relationship between the risk and the expected return and serves as a model for the pricing of risky securities.